Transcript The Marketplace In a market economy, buyers and sellers set prices. Section 1

The Marketplace
In a market economy, buyers and
sellers set prices.
The Marketplace (cont.)
• In a market economy, consumers
collectively have a great deal of influence
on prices of all goods and services.
• The demand of a good or service creates
supply.
• A market represents the freely chosen
actions between buyers and sellers.
demand: the amount of a good or
service that consumers are able and
willing to buy at various possible
prices during a specified time period
supply: the amount of a good or
service that producers are able and
willing to sell at various prices during
a specified time period
The Marketplace (cont.)
• In a market economy, individuals decide
for themselves the answers to:
– What?
– How?
– For Whom?
What are these questions called? HINT, you
learned it in chapter 1.
The Marketplace (cont.)
• A market economy is based on the
principle of voluntary exchange - a
transaction in which a buyer and a seller
exercise their economic freedom by
working out their own terms of exchange.
• Activity
The Law of Demand
The law of demand states
that as price goes up,
quantity demanded goes
down, and vice versa.
The law of demand states that as price
goes up, quantity demanded goes down. As
price goes down, quantity demanded goes
up.
The Law of Demand (cont.)
• Several factors explain the inverse relation
between price and quantity demanded,
or how much people will buy of any item at
a particular price.
• Factors include:
– Real income effect
– Substitution effect
real income effect: economic rule
stating that individuals cannot keep
buying the same quantity of a product
if its price rises while their income
stays the same
substitution effect: economic rule
stating that if two items satisfy the
same need and the price of one rises,
people will buy more of the other
The Law of Demand (cont.)
• Diminishing marginal utility:
– Utility - the ability of any good or service
to satisfy consumer wants
– Marginal utility - an additional amount of
satisfaction
– Law of diminishing marginal utility the additional satisfaction a consumer
gets from purchasing one more unit of a
product will lessen with each additional
unit purchased
Do you feel that the law of demand
benefits you as a shopper?
A. Always
B. Sometimes
C. Never
A. A
B. B
C. C
Page 176 -Doodles
Graphing the Demand Curve
A demand curve is a graph that shows
the relationship between the price of an
item and the quantity demanded.
Graphing the Demand Curve (cont.)
• Economist can show the relationship
between a change in quantity demanded
and a change in demand using a demand
curve.
View: Graphing the Demand Curve
Graphing the Demand Curve (cont.)
• A demand schedule is a table reflecting
quantities demanded at different possible
prices.
• A demand curve shows the quantity
demanded of a good or service at each
possible price. Demand curves slope
downward, clearly showing the inverse
relationship.
Pages 178-179
Determinates of Demand
A change in the demand for a particular
item shifts the entire demand curve to
the left or right.
Determinates of Demand (cont.)
• Factors that can affect demand for a
specific product or service:
– Changes in population
– Changes in income
– Changes in people’s tastes and
preferences
View: If Population Increases
View: If Income Decreases
View: If Preferences Change
Determinates of Demand (cont.)
– The availability and price of substitutes
– The price of complementary goods
• The decrease in the price of one good will
increase the demand for its complementary.
View: If Price of Substitute Decreases
View: If Price of Complement Decreases
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A change in the demand of a product
shifts the demand curve which way?
A. Up and down
B. Horizontally
C. Left and Right
D. Vertically
A.
B.
C.
D.
A
B
C
D
The Price Elasticity of Demand
Elasticity of demand measures how
much the quantity demanded changes
when price goes up or down.
The Price Elasticity of Demand (cont.)
• For some goods, a rise or fall in price
greatly affects the amount people are
willing to buy. This economic concept is
referred to as elasticity.
• The measure of how much consumers
respond to a given change in price is
referred to as price elasticity of demand.
View: Demand vs. Quantity Demanded
View: Goods with…
The Price Elasticity of Demand (cont.)
elastic demand: situation in which a given
rise or fall in a product’s price greatly affects
the amount that people are willing to buy
inelastic demand: situation in which a
product’s price change has little impact on
the quantity demanded by consumers
View: Demand vs. Quantity Demanded
View: Goods with…
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A vacation to Australia is an example
of which type of demand?
A. Elastic
B. Inelastic
A. A
B. B
Profits and the Law of Supply
The law of supply states that as price
goes up, quantity supplied goes up,
and vice versa.
Profits and the Law of Supply (cont.)
• To understand pricing, you must look at
both demand and supply.
• The law of supply states that as the price
of a good rises, the quantity supplied
also rises. As the price falls, the quantity
supplied also falls.
– The higher the price of a good, the
greater the incentive is for a producer to
produce more.
View: The Law of Supply
quantity supplied: the amount of a
good or service that a producer is
willing and able to supply at a specific
price
The Supply Curve
A supply curve is a graph that shows
the relationship between price and
quantity supplied.
The law of supply states that as price goes
up, quantity supplied also goes up. As price
goes down, quantity supplied goes down.
The Supply Curve (cont.)
• A supply schedule is a table showing
quantities supplied at different possible
prices.
• The supply curve is an upward-sloping
line that shows in graph form the quantities
producers are willing to supply at each
possible price.
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According to the supply curve, what
is the relationship between price and
quantity supplied?
A. Direct
B. Inverse
A. A
B. B
The Determinants of Supply
A change in the supply of a particular
item shifts the entire supply curve to
the left or right.
The Determinants of Supply (cont.)
• Many factors affect the supply of a specific
product. Four of the major determinants
are:
– The price of inputs
– The number of firms in the industry
– Taxes imposed or not imposed
View: If Inputs Become Cheaper
View: If Number of Firms Increases
View: If Taxes Increase
The Determinants of Supply (cont.)
– Technology
• Any improvement in technology will increase
supply.
technology: the use of science to
develop new products and new
methods for producing and
distributing goods and services
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View: If Technology Improves Production
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Which way will the supply curve shift
if there is an increase in supply?
A. Right
B. Left
C. Up
D. Down
A.
B.
C.
D.
A
B
C
D
The Law of Diminishing Returns
When a business wants to expand, it
has to consider how much expansion
will really help the business.
The Law of Diminishing Returns (cont.)
• Will product output continue to increase
proportionally as more workers are hired?
• The law of diminishing returns shows
that as more units of a factor of production
are added to the other factors of
production, after a certain point, the extra
output for each additional unit hired will
begin to decrease.
View: Supply vs. Quantity Supplied
View: Diminishing Returns
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Equilibrium Price
In free markets, prices are determined
by the interaction of supply and
demand.
Equilibrium Price (cont.)
• Demand and supply operate together. As
the price of a good goes down, the
quantity demanded rises and the quantity
supplied falls (and vice versa).
• The point at which the quantity demanded
and quantity supplied meet is called the
equilibrium price.
View: Equilibrium Price
View: Change in Equilibrium Price
The point at which the quantity demanded
and the quantity supplied meet is called the
equilibrium price.
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Prices as Signals
Under a free-enterprise system, prices
function as signals that communicate
information and coordinate the
activities of producers and consumers.
Prices as Signals (cont.)
• Rising prices signal producers to produce
more and consumers to purchase less.
• Falling prices signal producers to produce
less and consumers to purchase more.
• A shortage occurs when at the current
price, the quantity demanded is greater
than the quantity supplied.
• Prices above the equilibrium price reflect a
surplus to suppliers. (quantity supplied >
quantity demanded at current price.
Prices as Signals (cont.)
• When a market economy operates without
restriction, it eliminates shortages and
surpluses.
– When a shortage occurs, the price goes
up to eliminate the shortage.
– When surpluses occur, the price falls to
eliminate the surplus.
If a company didn’t make enough of a
certain shoe, and the demand for it
was high, what would happen to the
price?
A. It would increase.
B. It would decrease.
C. It would stay the same.
A. A
B. B
C. C
Price Controls
Under certain circumstances, the
government sometimes sets a limit on
how high or low a price of a good or
service can go.
Price Controls (cont.)
• A price ceiling is a government-set
maximum price that may be charged for a
particular good or service.
– Effective price ceilings, and resulting
shortages, often lead to non-market
ways of distributing goods and services
such as rationing and leading to the
black market.
View: Price Ceilings and Price Floors
rationing: the distribution of goods
and services based on something
other than price
black market: “underground” or
illegal market in which goods are
traded at prices above their legal
maximum prices or in which illegal
goods are sold
Price Controls (cont.)
• Conversely, a price floor, is a
government-set minimum price that can be
charged for goods and services.
Do you feel that the government
should be able to intervene in the
market?
A. Always
B. Sometimes
C. Never
A. A
B. B
C. C