Circular Flow of Income Let’s Draw!

STONER & BITER What do you think they stand for??? These acronyms will help you remember what cause demand and supply curves to shift

Bell Work What are the factors of production? Why do we need them both as consumers and producers? What is supply and demand?

Bell Work answers The resources need to make all goods and services – Land, Labor, Capital and Entrepreneurship Producers need to buy them to create goods and services Consumers need them to sell to producers and buy when they are finished goods Supply – amount available Demand – desire to own something

Warm Up – Can You Graph? USE A PENCIL!!!! Complete the Supply & Demand Schedules

6.1 – Circular Flow of Income Identify the Circular Flow of Income

I. Circular Flow of Income Factor Market- where businesses buy factors of production from households 1. Households earn income from selling land, labor, and capital Factor market: Incomes Businesses Households

Circular Flow of Economic Activity Product Market- business supply goods and services for sale to households Households return money to businesses by buying from firm Factor market: Incomes Circular Flow of Economic Activity Businesses Households Product market: Expenditures

Draw It!

What kind of Economy does the US have? The US was based on a free market economy but the US government (over time) has intervened to keep order, regulate, provide services and promote general welfare Technically its a Mixed-Economy because… individuals, companies and the government decide what gets produced

In a mixed economy, the government also plays a role Individuals and businesses pay taxes to the government The government uses that money to regulate the economy, make public works, and provide entitlements Factor market: Incomes Entitlements and Services Taxes and Fees Regulation Taxes Businesses Households Government Product market: Expenditures

Objective: Identify how supply and demand impact price

II. Supply and Demand Demand -desire to own something and the ability to pay for it Law of demand- When a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.

Draw a Demand Curve

Price Profits Price Profits Supply -the amount of goods available Law of supply- (Think like a producer) The higher the price, the larger the quantity produced. As price falls, quantity of supply falls. Price Profits Price Profits

Draw a Supply Curve

Equilibrium Price -When quantity demand and quantity supplied are at the same price Equilibrium is ideal for producers because more of their product gets sold Equilibrium is ideal for consumers because the right amount of product is available for the people who want it

Identify Equilibrium Price

Equilibrium Graph Practice Graph the following Supply and Demand Schedules Identify the equilibrium price

Surplus -If supply exceeds demand When price is too high, goods and services are limited by demand

Shortage – if demand exceeds supply, there will be a shortage Price is too low so goods and services exchanged are limited by supply

Identify Shortage & Surplus

Independent Practice Complete both sides of the worksheet. No notes are allowed unless you ask me.

Closure Summarize the circular flow. Draw a graph with supply and demand curves. Label each curve accordingly. Also label equilibrium 2 shortage and 2 surplus points.

III. Changes in Demand A. Change in the quantity demanded due to a price change occurs ALONG the demand curve An increase in the Price of Cupcakes from $3 to $4 will lead to a decrease in the Quantity Demanded of Widgets from 6 to 4.

B. Demand Curves can also shift in response to the following factors: (BITER: factors that shift the demand curve) 1. Buyers (# of): changes in the number of consumers 2. Income: changes in consumers’ income 3. Tastes: changes in preference or popularity of product/ service 4. Expectations: changes in what consumers expect to happen in the future 5. Related goods: compliments and substitutes

Prices of related goods affect on demand a. Substitute goods a substitute is a product that can be used in the place of another. -The price of the substitute good and demand for the other good are directly related -For example, Coke Price Pepsi Demand b. Complementary goods a compliment is a good that goes well with another good. -When goods are complements, there is an inverse relationship between the price of one and the demand for the other -For example, Peanut Butter Price Jam Demand

Changes in Demand Several factors will change the demand for the good (shift the entire demand curve) As an example, suppose consumer income increases. The demand for Widgets at all prices will increase.

Changes in Demand Demand will also decrease due to changes in factors other than price. As an example, suppose Widgets become less popular to own.

Time to Practice Demand!

IV. Changes in Supply A. Change in the quantity supplied due to a price change occurs ALONG the supply curve If the price of Cupcakes fell to $2, then the Quantity Supplied would fall to 4 Cupcakes.

Changes in Supply B. Supply Curves can also shift in response to the following factors: (STONER: factors that shift the supply curve) 1. Subsidies and taxes: government subsides encourage production, while taxes discourage production 2. Technology: improvements in production increase ability of firms to supply 3. Other goods: businesses consider the price of goods they could be producing 4. Number of sellers: how many firms are in the market 5. Expectations: businesses consider future prices and economic conditions 6. Resource costs: cost to purchase factors of production will influence business decisions

Changes in Supply Supply can also decrease due to factors other than a change in price. As an example, suppose that a large number of Widget producers go out of business, decreasing the number of suppliers.

Changes in Supply C. Changes in any of the factors other than price causes the supply curve to shift either: 1. Decrease in Supply shifts to the Left (Less supplied at each price) OR 2. Increase in Supply shifts to the Right (More supplied at each price)

Time to Practice Supply

Demand Shift Practice The Patriots win the 2015 Superbowl. What will this do to the demand of Patriots memorabilia?

Demand Shift Practice The price of toothpaste skyrockets. What will this do to the demand of toothbrushes?

Supply Shift Practice The US Gov’t approves a subsidy to aid Cotton farmers. What will this do to the supply of Haines cotton t-shirts?

Supply Shift Practice Summer is rapidly approaching. How will the CEO of Coppertone respond regarding the supply of sunscreen?