Economics: Today and Tomorrow

1
Section 1
The Marketplace
In a market economy, buyers and sellers set
prices.
2
Concept Trans 1
3
Section 1
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.

4
Vocab1
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
5
Section 1
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.
6
Section 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.

7

• Activity

8
Section 1
The Law of Demand
The law of demand states that as price goes up,
quantity demanded goes down, and vice versa.
9
VS 1
The law of demand states that as price goes up,
quantity demanded goes down. As price goes down,
quantity demanded goes up.
10
Section 1
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

11
Vocab7
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
12
Section 1
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

13
Section 1
Do you feel that the law of demand benefits you
as a shopper? A. Always B. Sometimes C. Never

1. A
2. B
3. C

14
Page 176 -Doodles
15
Section 2
Graphing the Demand Curve
A demand curve is a graph that shows the
relationship between the price of an item and the
quantity demanded.
16
Section 2
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
17
Section 2
Graphing the Demand Curve (cont.)

• A demand schedule is a table reflecting
  quantities demanded at different possibleprices.

• A demand curve shows the quantitydemanded of a
  good or service at each possible price. Demand
  curves slope downward, clearly showing the
  inverse relationship.

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Figure 2
Pages 178-179
19
Section 2
Determinates of Demand
A change in the demand for a particular item
shifts the entire demand curve to the left or
right.
20
Section 2
Determinates of Demand (cont.)

• Factors that can affect demand for a specific
  product or service

• Changes in population
• Changes in income
• Changes in peoples tastes and preferences

View If Population Increases View If Income
Decreases View If Preferences Change
21
Section 2
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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Figure 3
Page 180
23
Figure 4
Page 180
24
Figure 5
Page 181
25
Figure 6
Page 181
26
Figure 7
Page 181
27
Figure 8
Page 182
28
Section 2
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

1. A
2. B
3. C
4. D

29
Section 2
The Price Elasticity of Demand
Elasticity of demand measures how much the
quantity demanded changes when price goes up or
down.
30
Section 2
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
31
Section 2
The Price Elasticity of Demand (cont.)
elastic demand situation in which a given rise
or fall in a products price greatly affects the
amount that people are willing to buy
inelastic demand situation in which a products
price change has little impact on the quantity
demanded by consumers
View Demand vs. Quantity Demanded View Goods
with
32
Figure 9
Page 183
33
Figure 10
Page 184
34
Figure 11
Page 185
35
Section 2
A vacation to Australia is an example of which
type of demand? A. Elastic B. Inelastic

1. A
2. B

36
Section 3
Profits and the Law of Supply
The law of supply states that as price goes up,
quantity supplied goes up, and vice versa.
37
Section 3
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
38
Vocab20
quantity supplied the amount of a good or
service that a producer is willing and able to
supply at a specific price
39
Section 3
The Supply Curve
A supply curve is a graph that shows the
relationship between price and quantity supplied.
40
VS 2
The law of supply states that as price goes up,
quantity supplied also goes up. As price goes
down, quantity supplied goes down.
41
Section 3
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.

42
Figure 13
Pages 188-189
43
Section 3
According to the supply curve, what is the
relationship between price and quantity
supplied? A. Direct B. Inverse

1. A
2. B

44
Section 3
The Determinants of Supply
A change in the supply of a particular item
shifts the entire supply curve to the left or
right.
45
Section 3
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
46
Section 3
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
Page 190
View If Technology Improves Production
47
Figure 14
Page 190
48
Figure 15
Page 190
49
Figure 16
Page 191
50
Figure 17
Page 191
51
Figure 18
Page 192
52
Section 3
Which way will the supply curve shift if there is
an increase in supply? A. Right B. Left C. Up
D. Down

1. A
2. B
3. C
4. D

53
Section 3
The Law of Diminishing Returns
When a business wants to expand, it has to
consider how much expansion will really help the
business.
54
Section 3
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
55
Figure 19
Page 193
56
Section 4
Equilibrium Price
In free markets, prices are determined by the
interaction of supply and demand.
57
Section 4
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
58
VS 3
The point at which the quantity demanded and the
quantity supplied meet is called the equilibrium
price.
59
Figure 21
Page 196
60
Section 4
Prices as Signals
Under a free-enterprise system, prices function
as signals that communicate information and
coordinate the activities of producers and
consumers.
61
Section 4
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 gt
  quantity demanded at current price.

62
Section 4
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.

63
Section 4
If a company didnt 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.

1. A
2. B
3. C

64
Section 4
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.
65
Section 4
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
66
Vocab29
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
67
Section 4
Price Controls (cont.)

• Conversely, a price floor, is a government-set
  minimum price that can be charged for goods and
  services.

68
Section 4
Do you feel that the government should be able to
intervene in the market? A. Always
B. Sometimes C. Never

1. A
2. B
3. C