Markets in Action

1
Markets in Action

• EFL Lesson 4

2
How are prices set?

• By the 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)
• We limited the price at which transactions could
  take place
• -Not below 4.80 (price floor)  
• We restricted the number of sellers to two (still
  same buyers)

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1 vs. 100
EFL Style
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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.

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Round 1
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Ethanol Tortillas
http//beta.holamun2.com/news/entonces-ethanol
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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 dont 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.

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Round 1
Corn Subsidies and Ethanol
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Round 1
Corn Subsidies and Ethanol
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Round 1
Corn Subsidies and Ethanol
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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)?
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Round 2
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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.
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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.

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If raising the minimum wage to 7.25/hour is a
good idea, why doesnt 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 wouldnt go to
  college and there would be shortages of skilled
  labor.

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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?

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Round 3
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Ghana and EU Banana Imports
636 1000
http//www.youtube.com/watch?vblvxPshCDe4
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• 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 Ladys Finger, which is sweet
and creamy. Both of these are small in size and
weight.)
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• Since EU member countries dont 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.)
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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.
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• 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).
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Round 4
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iPhone Price Cut

• News Report On September 7, 2007, Steve Jobs
  (CEO of Apple) announced a price cut of 200
  (599 to 399) for Apples 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 Apples iTunes music store.

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What was the effect of Apples 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 its a
price effect, not a change in demand.
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Predict How will the iPhone price cut and gift
card offer likely affect the sales of Apples
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.

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How will Apples announcement affect the sales of
competitors phones and what do you think
competitors will do?

• The quantity supplied of both iPhones and
  competitors phones will increase because Apples
  price cut lowers the relative price of
  competitors products, too.
• Demand for competitors 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.

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Round 5
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Minimum Wage
http//video.aol.com/video-detail/minimum-wage-inc
reases/1638004371
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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 didnt 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 dont 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.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.