Assignment Summary:

When the Soviet Union, which had been a command economy, broke apart, an official of the new Russian government called an official of the American government and asked” “Who is in charge of bread distribution?”

It took a few minutes for the American official to fully understand the question.  But when he did, he answered: “No one.” 

The Russian could not understand that.  How can wheat be grown, ground into flour, baked into bread and distributed to stores without the government telling everyone what to do?

Use your knowledge of supply and demand (chapter 4) and key concepts learned in the  chapters assigned this week (chapters 1-4) to explain to the Russian official how this process works.  You must refer to at least two key concepts from week 1.  Use CAPITAL LETTERS to name and define each concept.  Please refer to the list of key concepts found at the end of every chapter.

You don’t have to do it all in one post.  Instead, you may wish to discuss one market at a time or, perhaps, explain just why is that our system does not have a distribution plan.

This is a true story.  The Russian government really did call the United States government and asked how to distribute bread in a free market system.  How that is done is so normal for us, that we probably don’t even think about it.  But now is a good time to think about it and obtain a better understanding of a free market.

1) Review the 

Supply and Demand Guide

 and the 

Supply and Demand PowerPoints

 before you start your posts.

2) Review Chapter 4 in the textbook.

3) Then consider the multiple steps (markets) involved in producing and distributing the loaves of bread that you find in your local supermarket.  Explain to the Russian official how the free market accomplishes this rather impressive task.  

Remember to refer to the appropriate graph(s) in the Supply and Demand Guide as you examine the various markets involved.  If you wish to draw an appropriate graph and attach it to your post you may, but that is not required.  (If you do, be sure to explain the graph in your post, but don’t attach your post, just the graph).

• Include a word count  
• Use paragraphs as appropriate.
• Remember to document all use of sources by using citations and references.  These should be in APA format.

SUMMARY OF CHAPTER 4:

· Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.

· The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.

· In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. If one of these factors changes, the demand curve shifts.

· The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.

· In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. If one of these factors changes, the supply curve shifts.

· The intersection of the supply and demand curves determines the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied.

· The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise.

· To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. To do this, we follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide in which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium.

· In market economies, prices are the signals that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to consume and how much sellers choose to produce.

Mankiw, N. Gregory. Principles of Economics (Mankiw’s Principles of Economics) (Page 86). South-Western College Pub. Kindle Edition.

Key Concepts: market, p. 66 competitive market, p. 66 quantity demanded, p. 67 law of demand, p. 67 demand schedule, p. 67 demand curve, p. 68 normal good, p. 70 inferior good, p. 70 substitutes, p. 70 complements, p. 70 quantity supplied, p. 73 law of supply, p. 73 supply schedule, p. 73 supply curve, p. 74 equilibrium, p. 76 equilibrium price, p. 76 equilibrium quantity, p. 76 surplus, p. 77 shortage, p. 77 law of supply and demand, p. 78

Supply and Demand Guide

To solve the homework problems do the following:

1. Identify the determinant change

2. Shift the appropriate curve in the correct direction

3. Change price appropriately

4. Move along the other curve (the one that did not shift) in response to the price change.

The following information will tell you the determinants and how the change, as well as definitions of the key terms.

Demand

Demand: The amount that consumers are willing and able to purchase at various prices.

Law of Demand: Price and Quantity Demanded vary inversely.

Quantity Demanded: The amount that consumers are willing and able to buy at a particular price.

Change in Quantity Demanded: Changes in price change the quantity demanded. This is a Movement Along a Demand Curve in Response to a Price Change.

Change in Demand: This is a shift in the position of the demand curve, either upward or downward. If the curve shifts upward, consumers are saying they will pay more for all quantities of the good or service. If it shifts downward, consumers are saying they will pay less for all quantities of the good or service.

Determinants of Demand: The Demand Curve will shift
only
when one (or more) of the Determinants of Demand changes. These determinants are:

1. Size of Market: the number of consumers in the market for the good or service. If this factor increases, the curve shifts upward (increase in demand). If this decreases, the curve shifts downward (decrease in demand).

2. Consumer Tastes and Preferences: if these shift in favor of a product, the demand curve shifts upward (demand increases); if these shift against a product, the demand curve shifts downward (demand decreases).

3. Consumer Income: as the income of consumers increase, consumers purchase more of all normal goods (assume all the goods in the homework are normal goods), this shifts the demand curve upward (demand increases); if income decreases, then consumers buy less of all normal goods, this shifts the demand curve downward (demand decreases).

4. Prices of Related Goods:

a. Complimentary Goods: These are goods that are used to together like peanut butter and jelly. If the price of peanut butter goes up, the Quantity Demanded of peanut butter will decrease (a movement along a demand curve in response to a price change). However, the Demand for jelly will decline (decrease in demand) as fewer people buy it to go with the peanut butter, since they are buying less peanut butter.

b. Substitute Goods: These are goods that are used in place of each other. If the price of Coke Cola goes up, the Quantity Demanded of Coke does down (a movement along the demand curve). But the Demand for Pepsi – the substitute good – goes up as people substitute the lower priced Pepsi for the higher priced Coke (the Pepsi demand curve shifts upward).

5. Expectations about the Future: If people have a positive view of the future they will consumer more and save less. This shifts the demand curve for all normal goods upward. If people have a negative view of the future, they will consume less and save more, this shifts the demand curve for all normal goods downward.

Supply

Supply: The amount that producers are willing and able to bring to market at various prices.

Law of Supply: Price and Quantity Supplied vary directly.

Quantity Supplied: The amount that producers are willing and able to bring to market at a particular price.

Change in Quantity Supply: Changes in price change the quantity supplied. This is a Movement Along a Supply Curve in Response to a Price Change.

Change in Supply: This is a shift in the position of the supply curve, either upward (inward) or downward (outward). If the curve shifts upward, producers are saying they will bring less to market at all prices. If it shifts downward, producers are saying they will bring more to market at all prices.

Determinants of Supply: The Supply Curve will shift
only
when one (or more) of the Determinants of Supply changes. These determinants are:

1. Number of Firms in the Industry: If the number of firms in an industry increases, the more the industry can produce – this shifts the supply curve downward (outward) – this is an increase in supply. If the number of firms in an industry decreases, the industry can produce less output – this shifts the supply curve upward (inward) – this is a reduction in supply.

2. Relative Price of Alternative Outputs: If a firm can produce Product A or Product B with the same resources (inputs), it will produce the product with the higher price. If the price of Product A increases relative to Product B, then the firm will produce more of A and less of B. This causes the Supply Curve for A to shift outward (increase in supply) and the Supply Curve for B to shift upward (decrease in supply).

3. Costs of Production*: The costs of production is the primary determinant of supply. If the costs of production increase, then supply decreases – the Supply Curve shifts inward (a decrease in supply). If the costs of production decrease, then supply increases – the Supply Curve shifts outward (an increase in supply).

4. Expectations About the Future: If firms have a positive view of the future, they will increase production which is an increase in supply – the curve shifts outward. If firms have a negative view about the future, they will decrease production and the supply curve will shift upward – a decrease in supply.

* The Costs of Production include:

· Prices of inputs – the Factors of Production

· Business Taxes

· Complying with regulations

· Less any Subsidies the firm may receive

In equilibrium, the quantity supplied equals the quantity demanded.

Graph A

When one or more of the determinants of demand (see above) change such that the demand for a good increases, that shows that consumers are willing to pay more for all possible quantities of the good. The upward shift in the demand curve causes an
increase

in price. Suppliers respond to the higher market price by bringing a
greater

quantity supplied to market – recall the Law of Supply.

SHAPE

Graph B

When one or more of the determinants of demand (see above) change such that the demand for that good decreases. The demand curve reflects this by shifting downward, showing the consumers are willing to pay less for all possible quantities of the good. This causes a
decrease

in price. Suppliers respond to the price change by bringing a
lesser

quantity supplied to market – recall the Law of Supply.

SHAPE

Graph C

When one or more of the determinants of supply (see above) change such that the supply for that good increases, the supply curve shifts outward showing that suppliers can bring more product to market at lower prices for all possible quantities. This causes a
decrease
in price. Demanders will respond to the price change with a
greater
quantity demanded – recall the Law of Demand.

SHAPE

Graph

D

When one or more of the determinants of supply (see above) change such that the supply for that good decreases, the supply curve shifts inward showing the suppliers can bring fewer products to market at higher prices for all possible quantities. This causes an
increase
in price, and demanders are willing to buy a
lesser
quantity demanded – recall the Law of Demand.

SHAPE

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