1. EFL Lesson 4
Markets in Action

2. By the Market ! How are prices set?
Where do prices come from? Who determines the prices? Buyer or seller? Takes both buyers and sellers – otherwise we don’t have a market

3. In the Chips: What would happen if…..
We limited the price at which transactions could take place
-Not above $3.80 (price ceiling)
-Not below $4.80 (price floor)  
We restricted the number of sellers to two (still same # buyers)

4. 1 vs
EFL Style

5. Economics 1 vs. 100
Sit with your team. Your team will start with $3 to play 3 rounds.
Each question is worth $1. If you answer the question correctly, you keep your $. If your answer is incorrect, you forfeit your $.
Answers must be in written form and complete when time is called.
Decisions of the judges are final re: whether your answer is correct.
Every team must play every round. There are no drop- outs, only forfeiture of $1.

6. Round 1

7. Ethanol & Tortillas http://beta.holamun2.com/news/entonces-ethanol
Picture is link to video

8. Why is the price of tortillas increasing?
Big restaurant chains have driven up prices by adding tortillas to their menus.
Farmers have had a bad year with weather in the Midwest, so there is less corn available.
Trade agreements between Mexico and the US have set a high price on corn in both countries.
The demand for corn by ethanol producers has increased.

9. Restaurants in Mexico have announced higher prices for tortillas in the past year. How do we explain these announcements in an open market?
Because the demand for tortillas has decreased in favor of other foods, restaurants face higher marginal costs of production.
Because the supply of tortillas has decreased, restaurants face higher marginal costs of production.
Demand for tortillas is increasing, which raises the market price that restaurants must charge.
Demand for tortillas is decreasing so restaurants make up for lost revenue by raising prices.

10. One Mexican consumer was quoted as saying, “…as long as [tortilla prices don’t] go up like gas prices I think that I would be ‘OK’ with paying an extra 20 to 25 cents for a good tortilla.” Can this claim be true for all consumers at their current quantity demanded? Which of the following statements about the market is correct?
It cannot be true because it would imply that the previous price of tortillas was not a market equilibrium price.
It cannot be true because so many restaurants serve tortillas that they have a great deal of market power.
It can be true because restaurants keep prices below cost in order to keep from losing customers.
It can be true because restaurants do not know if or when the demand for tortillas decreases.

11. Round 1
Corn Subsidies and Ethanol

12. Round 1
Corn Subsidies and Ethanol

13. Round 1
Corn Subsidies and Ethanol

14. Round 1 Questions to ponder…
1. What would the effect of massive flooding around the Midwest be in the market for corn?
2. Will this make the tortilla situation as discussed earlier better or worse?
3. What would you expect to happen to the price
of beef given the above scenario(s)?

15. Round 2

16. States’ Minimum Wages
One of the less-noted results of the 2006 mid-term elections was that six states voted to join the 22 that have already raised the minimum wage above the federally mandated $5.15/hour. In subsequent legislation, the newly elected Congress imposed the increase on the remaining states, with the minimum wage rising to $6.50/hour in July 2008 and then to $7.25/hour in 2009.

17. The purpose of minimum wage legislation is to make employers pay more than they would otherwise – that is, more than they would in an open market. Which of the following should we expect to happen when the minimum wage is set above the “prevailing wage” that occurs in a labor market?
There will be higher incomes as everyone will be paid more.
The increase in minimum wage encourages people to find a better balance between work and home life.
The supply of labor increases as more people move into the labor market seeking higher paying jobs.
Businesses will raise prices as this is just a cost to be passed on to consumers.

18. Suppose that the minimum wage is increased but it is below the “prevailing wage” in the labor market. What would you expect to happen in this situation?
The quantity of labor demanded will increase.
Many new firms will succeed in hiring new employees at the minimum wage instead of the “prevailing” wage.
The higher minimum wage will cause more workers to seek jobs overseas.
The higher minimum wage will attract more low- paid, unskilled workers to the United States seeking lawful employment.

19. If raising the minimum wage to $7
If raising the minimum wage to $7.25/hour is a good idea, why doesn’t Congress make it a better idea and raise it to $20 or even $100?
Higher wages will eventually increase unemployment and business failure.
We should. A $20 minimum wage would add more money to the economy.
Too many people would enter the labor market and find jobs at these higher wages, so that households would fall apart.
At these wage rates, people wouldn’t go to college and there would be shortages of skilled labor.

20. Questions to Ponder…..
1. What effects does limiting legal immigration have on our economy and labor markets?
2. What effects do minimum wage increases have on immigration (legal or illegal)?
3. What is the best way to help low skilled workers?

21. Round 3

22. Ghana and EU Banana Imports
6:36 – 10:00

23. What is the effect of restrictions on banana length and weight (i. e
What is the effect of restrictions on banana length and weight (i.e., bananas must be long and heavy) on the market for bananas in the European Union?
The equilibrium (market) price rises and consumers’ choices are restricted.
(The restrictions keep out particularly desirable varieties, such as the apple banana, which tastes like apple, and the Lady’s Finger, which is sweet and creamy. Both of these are small in size and weight.)

24. Since EU member countries don’t have commercial banana growers, why does the EU place such restrictions on its own consumers? (Who benefits?)
European growers of other kinds of fruits.
(The EU countries do not grow bananas, but they grow other fruits which are substitutes for bananas. Making imports conform to size and weight restrictions not only raises the cost, but also means that the bananas coming in are less sweet, which also encourages consumers to substitute other fruits for bananas.)

25. The bananas shown in the video bear the Fairtrade certification mark, meaning that they have been produced by small farmer organizations or in plantations that meet very high social and environmental standards. Farmers who produce Fairtrade Certified Bananas are guaranteed a floor price (Fairtrade Minimum Price) to cover the average cost of production, and a Fairtrade Premium of 1US$ per box of bananas to invest in social and economic initiatives in their communities.

26. What effect does FairTrade labeling have on the quantity demanded for Fair Trade labelled bananas?
It depends. Either:
Enough consumers who value socially conscious consumption will seek out such products and be willing to pay more, causing QD to increase (more will be sold). Or
Consumers may not value such labels and will be unwilling to pay the higher price, causing QD to decrease (sales will fall).

27. Round 4

28. iPhone Price Cut
News Report: On September 7, 2007, Steve Jobs (CEO of Apple) announced a price cut of $200 ($599 to $399) for Apple’s new iPhone. The iPhone had been on the market for 4 months and sold almost 1 million units at the higher price. To temper the concern of those who paid $599, Jobs offered them a $100 rebate in the form of a gift card for use at Apple’s iTunes music store.

29. What was the effect of Apple’s price cut on the market for iPhones?
It increased quantity sold as the price reduction attracted more people to purchase an iPhone.
The quantity sold did not increase because the people who wanted them waited in long lines before Christmas and paid $599.
Demand increased.
Supply decreased.
Remember the difference between QD and Demand. Only the price changed in this example, so it’s a price effect, not a change in demand.

30. Predict: How will the iPhone price cut and gift card offer likely affect the sales of Apple’s iPod music players?
People will buy fewer iPods waiting to see if Apple will reduce their price, too.
The rebate lowers the cost of owning an iPod, so at the margin quantity sold will increase.
Unlike iPhone, competitors sell good substitutes for iPod, so the gift cards will have no effect on quantity sold.
I only.
II only
I and II only
All of the above.

31. How will Apple’s announcement affect the sales of competitor’s phones and what do you think competitors will do?
The quantity supplied of both iPhones and competitor’s phones will increase because Apple’s price cut lowers the relative price of competitor’s products, too.
Demand for competitor’s phones will decrease and they will raise their prices to remain in equilibrium.
The iPhone is unique so there will be no effect on competitors because they are operating in a different market.
The iPhone is a substitute for competitors’ products, so they are likely to cut prices.

32. Round 5

33. Minimum Wage
Picture is video link

34. According to the video, the minimum wage in North Dakota has not changed in 10 years. Ten years ago, the prevailing (market) wage was 10% below the new minimum wage set by the legislation. Predict: What is the effect of that same minimum wage today?
It still contributes to unemployment because it makes employers pay more than they would if the law didn’t exist.
It has little or no affect on unemployment or wages because inflation has likely raised wages above what the law requires.
It causes poverty in North Dakota because employers don’t have to pay more than the minimum wage even though there has been inflation for the past 10 years.
It reduces poverty in North Dakota because it keeps production costs down and the prices of goods and services are more affordable.

35. In the video, Don Morrison (NDPeople
In the video, Don Morrison (NDPeople.org) said the “whole point” is that a higher minimum wage works its way up, so that skilled workers also earn higher wages than before. What of the following would make his prediction inaccurate?
The new minimum wage increases unskilled workers’ demand for training.
The new minimum wage increases unemployment among less skilled workers
Skilled workers move out of North Dakota for higher wage markets.
Employers move out of North Dakota for lower cost labor markets.

36. Over 21,000 North Dakotans will be affected by the new Federal law that raises the minimum wage from $5.15 to $5.85 per hour. The wage will rise again in July 2008 to $6.50 per hour and in 2009 to $7.25 per hour. Which of the following statements is true about labor conditions in North Dakota during these changes?
The 40% increase in minimum wage will increase incomes of all workers.
The 40% increase in minimum wage will keep workers and firms from leaving North Dakota.
The supply of labor will increase as people move to North Dakota seeking higher paying jobs.
Unemployment rates among lower skilled workers will increase.