Goal 8.05 Predict how prices change when there is either a shortage or surplus

1. Goal 8.05 Predict how prices change when there is either a shortage or surplus • In a market economy, what is the basis for making economic decisions. • Surplus: amount by which quantity supplied is higher than the quantity demanded. • Shortage: amount by which quantity demanded is higher than the quantity supply • Equilibrium price assures no surplus or shortage

2. I: Price Controls • Sometimes the government set the price of a product because it thinks that the forces of supply and demand are unfair. • Can favor either consumer or producer • Price Ceiling: maximum price set by the government that can be charges for goods and services • Price Floor: government minimum price that can be charged. • Price Floors are more common than price ceiling. Ex. Minimum wage (lowest legal wage for workers)

3. What can you assume, if, over time, a product surplus does not force down prices? • If the price of a product is above its equilibrium price, what is the result? • Prices are signals that help businesses and consumers make decisions. • So, what do prices tell us? • In a free market, prices are neutral, flexible, offer choice, and are familiar.

4. Goal 8.06 Explain how changes in the level of competition can affect price and output levels. • GDP-Gross Domestic Product =is the total value in dollars of all the final goods and services produced in a country in one year. • GDP is measured only by new goods not used goods.

5. II: Measuring GDP • GDP is calculated by adding up the value of all final goods and services produced in country in a single year. • GDP is used by to analyze how the economy is doing. • Important indicator of the standard of living in a country ( luxuries and necessities that make life better and easier) • Weakness of GDP is that it does not measure overall society well being. • NDP= Net Domestic Product: loss of value due to wear and tear. Depreciation of durable goods and capital goods. NDP takes GDP and subtracts cost of depreciation. • Gross National Product vs. Gross Domestic Product GNP is GDP plus investment, earnings and foreign investment by US citizens.

6. The Circular Flow Model • The American free enterprise (capitalist) system is a wonder of wonders. Just how do we ensure that all of our citizens needs are provided for? How do we make sure that we produce what we need and that those goods are allocated fairly (distribution). Of course I am referring to the three basic economic questions. So, just how do we ensure they are being answered properly. Well, the reality is, we don't! • In America, and in all basically capitalist systems we rely on a rather complex theoretical model to tell us this whole free enterprise thing works. This model is called the Circular Flow Model. What the circular flow model tells us is that three basic elements of the econmy will work and interact together to ensure that our needs and wants are provided for. • There are three basic elements, or what are referred to as sectors, of the economy that must interact. These sectors are: • Consumer • Business • Government • Circular flow basically shows us that input from each sector and to each sector spurs on production and thus goods and services are created. Here is a graphical representation of circular flow: • As you can see, each sector of the economy feeds another. Households (consumers) provide businesses with payments in exchange for jobs and goods and services. Government provides consumers and businesses with payments in exchange for goods and services from business and taxes and resources from consumers. It is what is called a symbiotic relationship. We all rely upon one another. • Is the circular flow model complete? No, nor is it meant to be. It is merely a theory that explains how free enterprise works. Banks for example, a very important part of the economy, are left out. • Some socities do not accept the circular flow model theory. These socities, therefore, choose another economic system other than capitalism. Socialists and communists see the role of the government in a different light than capitalists do. They see a government that must in some cases should provide for all needs (command) and in other cases provide for some needs (socialist). They do not trust that this will all just work out the way the theory says it will. • Does circular flow work? The answer is yes and no. Yes, in that we are a wealthy, productive society. No, in that there are some citizens who fall through the cracks and do not have their needs met. We try to help them and thus move closer to socialism and increase the role of government. This is why we are really a mixed economy and not a pure capitalist economy.

8. I: Market Basics • A:Market:Place where goods and services are bought and sold • Market price: the price paid by the buyer and accepted by the seller • Perfect competition: a market with a large number of firms all producing the same product at the same price. • B: Monopoly: a firm is the only producer of a product and there is not a close substitute. • 1. Govt. regulated or natural monopolies Ex: public utilities; gas companies, electric companies.

9. C: Oligopoly: few firms dominate the market and the products offered are substitutes, if not identical. Examples: soft drink companies, airline industry, oil companies.

10. II: Mergers • A: when two or more firms join to make one bigger firm, they merge. These mergers or business combination occur in three ways. • 1. Horizontal merger join two or more firms that produce the same product. Ex: Exxon and Mobil Oil, AT&T and Sprint, • 2. Vertical Merger a business at a different level or stage of the product delivery process buys another firm. Ex: A grocery chain buys a dairy. The firm then produces and sells the milk. Or a car manufacturer buys a tire company.

11. Cont. • 3. Conglomerate forms when companies in unrelated businesses join together. General Electric is an example • A multinational conglomerate is a firm that operates in more than one country and unrelated businesses merge. Ex: Walt Disney, NewsCorp, General Electric, Bayer, Nokia.