Unit 3 Markets: not just for fleas and stocks!

1. Unit 3 Markets: not just for fleas and stocks!

2. Specialization and Voluntary Exchange

3. Specialization Specialization: people/companies learn and practice a small set of skills then work with others with differentskills to produce something The assembly line idea

4. Why does specialization work? Skills are developed at a deeper level people become “experts” in their field Costs are cut because time needed to produce is decreased Training can be more focused and in-depth Remember: People, Stores & industries specialize

5. Examples of specialization Doctors – cardiologists, dermatologists, dentists, podiatrists, rhinologists

6. Examples of specialization Teachers – grade level, subject, coaches Stores at the mall – food court, hats, electronics, shoes, clothes Write two examples of specialization in each of these areas: Restaurant Movie Courts

7. How does specialization relate to voluntary exchange? Because we specialize, we rely on others for the things we don’t produce In an exchange, BOTH sides are looking to gain something BOTH sides gain in VOLUNTARY, NON-FRAUDULENT EXCHANGE

8. How does each side gain in these potential transactions? LAWYER

9. Circular Flow

10. GPS • SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. • Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money. • Explain the role of money and how it facilitates exchange.

11. Components of the circular flow • Product market • Factor (resource) market • Households • Businesses • Government • Money • Goods/services • Resources

12. Taxes Taxes GOVERNMENT Goods and Services

13. Explaining the Circular Flow diagram • Imagine a family wants to have some popcorn to eat during movie night. The family would be represented by the “Households” box on the left. Rather than do everything themselves to produce the popcorn someone in the household will just go to a grocery store and buy the popcorn. The grocery store is the “Product Market,” where people pay money (“Expenditures”) to get the goods they need (“Products” like popcorn). • Where did the family get the money to pay for the popcorn? Very likely, someone worked at a job in return for a salary. In the diagram, the working family member of the household provided labor (a “Productive Resource”) at a “Factor Market” (also called a “Resource Market”) in return for “Income,” or money.

14. Explaining the Circular Flow diagram (continued) • That explains the left side of the diagram, showing how the family demanded popcorn and then acquired it. The right side of the diagram shows how the popcorn was supplied. To be a successful popcorn “Business,” a company must secure kernels of corn; these are the primary “Resource” needed to produce popcorn. In the diagram, the “Resource” can be paid for by “Wages, Interest, Net Profit.” This just illustrates that there is a variety of ways a business can pay for its resources. If the popcorn company owns its own farm, it would pay “Wages” to its employees to harvest the “Resource.” If it doesn’t own its own farm, it might pay money (“Net Profit”) to some independent farmer in order to purchase corn, its “Resource.” • Once the business has its kernels of corn, it’s time to package them and prepare them for sale in the grocery store. These bags of popcorn are the “Goods” that travel to the “Product Market.” Of course, the popcorn company doesn’t give its popcorn away; the grocery store must pay the popcorn maker money, which is shown as the “Revenue” arrow.

15. Supply and Demand

16. GPS • SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy. • Define the Law of Supply and the Law of Demand. • Describe the role of buyers and sellers in determining market clearing price.

17. Demand • amount of a good or service that consumers are willing and able to purchase at various prices • this can be represented by a graph or by a table • DIFFERENT THAN QUANTITY DEMANDED • QUANTITY DEMANDED – amount a consumer is willing and able to purchase at a SPECIFIC price

18. Demand Graph • Demand line = D • Essential components • Y axis = prices of good • X axis = quantity of good • AXES MATTER! • Demand line = D • At $2, there is a QUANTITY DEMANDED of 5 Price (P) $2 D 5 Quantity (Q)

19. Law of Demand • THERE IS AN INVERSE RELATIONSHIP BETWEEN PRICE and QUANTITY DEMANDED Why? • the more expensive something becomes, the more likely people are to find a substitute • diminishing marginal utility

20. The demand curve shows the amount of goods or services that buyers are able and willing to purchase at different prices.

21. Supply • amount of a good or service that producers are willing and able to sell at various prices • this can be represented by a graph or by a table • DIFFERENT THAN QUANTITY SUPPLIED • QUANTITY SUPPLIED – amount a producer is willing and able to sell at a SPECIFIC price

22. Supply Graph • Essential components • Y axis = prices of good • X axis = quantity of good • Supply line = S • At a price of $2, there is a QUANTITY SUPPLIED of 3 • Supply line = S Price (P) S $2 3 Quantity (Q)

23. Law of Supply • THERE IS A DIRECT RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED Why? • the higher the price, the more likely the chance for a greater profit to be made

24. The graph shows the firm’s supply, the quantity of goods or services that someone is able and willing to supply at different prices.

25. Price • IF ALL THAT CHANGES IS PRICE, then ONLY QUANTITY DEMANDED or SUPPLIED CHANGES!!!!!!!! P P1 P2 D Q Q1 Q2

26. Supply and Demand

27. Explaining Supply and Demand • At equilibrium, the demand exactly equals supply, which is why P is called the equilibrium price and Q is called the equilibrium quantity. If a firm produces Q* at a price of P*, they should be able to sell all that they make. This is very efficient, and efficiency is good for a business. • Equilibrium price is also called market clearing price

28. GPS SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy. Define the Law of Supply and the Law of Demand. Describe the role of buyers and sellers in determining market clearing price. Illustrate on a graph how supply and demand determine equilibrium price and quantity. Explain how prices serve as incentives in a market economy.

29. GPS • SSEMI3 The student will explain how markets, prices, and competition influence economic behavior. • Identify and illustrate on a graph factors that cause changes in market supply and demand. • Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages. • Define price elasticity of demand and supply.

30. DEMAND SHIFTS (IRDL) • Assume that a diamond ring costs $200 • At $200 buyers are buying around 100 a day • If the price were $100, buyers would be buying 150 a day • What happens if people’s income doubles? • Now, at $200, people want 150 rings. • What about at $100? Will people want more or less? Market for Diamond Rings P $200 $100 D2 D Q 100 150

31. Determinants of Demand (Things that shift the entire line!)(*All statements work in reverse as well!) • elated goods (Complements and Substitutes) • Complements – if price of complement increases, demand for the other good decreases • Substitutes – if price of substitute increases, demand for other good increases. • R • I • P • E • N ncome – income increases, demand increases references – preferences increase, demand increases xpectations – expect higher prices in future, current …. demand increases umber of buyers – # of buyers increase, demand increases

32. Shifting Demand (RIPEN) not price

33. Determinants of Supply (Entire Line) • overnment decisions • Taxes – taxes increase, supply decreases • Subsidies – subsidies increase, supply increases • Regulation – regulations increase, supply decreases • G • R • E • N • T esource prices or availability - *prices have an inverse relationship, *availability has a direct relationship xpectations – expect to sell more, supply increases; expect to sell at higher prices, immediate supply decreases. umber of producers – direct relationship to supply echnology or training – direct relationship to supply

34. Shifting Supply (GRENT) not price

35. Price ceilings lead to shortages • This figure illustrates the shortage that occurs when a price ceiling is imposed on suppliers. Consumers demand QD while Suppliers are only willing to supply QS.

36. Price Floors lead to surpluses:Market for Wheat

37. Why does a price floor lead to a surplus? • “Price Floors in Wheat Markets” shows the market for wheat. Suppose the government sets the price of wheat at PF. Notice that PF is above the equilibrium price of PE. At PF, we read over to the demand curve to find that the quantity of wheat that buyers will be willing and able to purchase is W1 bushels. Reading over to the supply curve, we find that sellers will offer W2 bushels of wheat at the price floor of PF. Because PF is above the equilibrium price, there is a surplus of wheat equal to (W2 − W1) bushels. The surplus persists because the government does not allow the price to fall.

38. Define Price elasticity • economists occasionally talk about price elasticity. Elasticity refers to the percentage change in quantity divided by the percentage change in price, and it can refer to both supply and demand. The main idea is to track how much a change in price affects a change in quantity, and vice versa.

39. Illustration of inelastic demand

40. Explanation for case 1 • In Case 1, price increases greatly, from P1 to P2. However, consumers still desire the good provided, so while quantity demanded is diminished, it is only a small drop from Q1 to Q2. As the change in price is greater than the change in quantity demanded, the demand curve for this good is said to be inelastic.

41. Illustration of elastic demand

42. Explanation for case 2 • A small change in price in Case 2 leads to a great decrease in the quantity demanded. Since this good is very sensitive to changes in price, this good has a demand curve that is elastic.

43. Elasticity in supply curves work under the same principle as elasticity in demand curves. In Case 1, a larger change in price leads to a smaller change in quantity, so the supply curve in Case 1 is inelastic. In Case 2, a smaller change in price leads to a greater change in quantity, showing that the supply curve in Case 2 is price elastic.

44. Market Structures

45. GPS • SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy. • Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.

46. Competitive Markets

47. 2 Major Types of Competitive Markets Pure Competition Monopolistic Competition

48. PURE COMPETITION No single buyer or seller controls supply, demand, or prices There are 4 conditions for PC Many Buyers and Sellers Identical Products Informed Buyers Easy Market Entry and Exit

49. 1. Many Buyers/Sellers Each company or producer accounts for a small portion of goods Everyone acts INDEPENDENTLY, little or no teamwork among competitors

50. 2. Identical Products Buyers choose goods almost SOLELY based on price, not quality Consumers are highly informed about product