■Learning Target –How does a supply/demand curve represent the economy? –How does a supply/demand curve function? –What is the law of supply? –What is the law of demand? SSEF1a-d ■Warm-Up Question: –What is the role of buyers and sellers in the marketplace? –What is the role of money in the marketplace?

Interdependence and the Flow of Money ■The Circular Flow of Economic Activity (3 major players) –Households (HH) –Businesses (Firms) –Government (G) ■2 Major Markets: –Product Market –Factor (Resource) Market

Demand ■Demand –The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific period. Willingness = a person’s want or desire for a good. Ability = having money to pay for a good.

The Law of Demand ■Tells us what happens to the quantity demanded when the price changes. –If P then Q d (Where P = price and Qd = Quantity demanded) –This gives us an inverse relationship

Law of Demand –This gives us an inverse relationship ■Law of Demand is based on rational behaviors.

Demand Schedule ■A chart with all quantities at given prices. It shows the Law of Demand. ■Example:

Demand Curve ■A graphic illustration of the Demand Schedule

Review Question (1/3) ■A demand schedule – A. relates price to quantity supplied – B. is a demand curve when graphed out – C. cannot change – D. shows a direct relationship between price and quantity

Review Question (2/3) ■When you buy a hamburger for lunch, you are using money as a – A. standard of deferred payment – B. standard of value – C. medium of exchange – D. store of value

Review Question (3/3) ■A farmer's tractor is an example of which factor of production? – A. labor – B. entrepreneurial skills – C. capital – D. land

Warm-up ■What are some factors that may affect a consumer’s demand curve for a given product? Make a list of factors and describe why each may have an effect.

Change (∆) in Demand vs. Change (∆) in Quantity Demanded ■∆ in Demand = a shift caused by a determinant (an influencing factor) of demand ■∆ in Quantity Demanded = a change along the demand curve caused by change in price. Demand = the ENTIRE cure Quantity Demanded = a POINT on the curve

Demand ■Demand can change: –When demand goes up – the curve shifts to the right –When demand goes down – the curve shifts to the left

Shifts (Change / ∆) in Demand & Determinants of Demand ■Causes of increases or decreases in Demand: –Income –Tastes and Preferences –Price of Relative Good –Expectations –Population

Determinants of Demand ■Income: As a person’s income changes they may buy more or less of a certain good. ■Normal Good – if a person’s income and demand change in the same direction. –Ex. Now that Robert is making twice as much, he buys more CDs

■Inferior Good – if income and demand go in opposite directions. –Ex: Now Robert doesn’t have to eat SPAM anymore, he can afford steak. That makes SPAM an inferior good to steak.

■Neutral Good – if demand does not change even though income does. –Ex: Robert still needs the same amount of toilet paper, toothpaste, and deodorant. These goods are neutral goods.

Brainstorm a list of goods that you demand: What would be a substitute good for each of these items: What would be a complement good for each of these items:

Determinants of Demand ■Tastes and Preferences: –As Fads go up, so does demand –Fad Demand

Determinants of Demand ■Related Goods –When 2 goods are substitutes (a similar good), the demand for one moves in the same direction as the price of the other. ■Complement Goods: –When 2 goods are complements (goods used together), the demand for one moves the opposite direction of the price of the other.

■Expectations (what buyers are predicting determines CURRENT demand) ■Future Price –Future Price Demand ■Future Income –Future Income Demand ■Future Availability of Goods –Future Price Demand Determinants of Demand

Review Question (1/2) ■If Southwest Airlines expects the price of fuel to rise, and decides to buy fuel now instead of later, what will happen to the current demand for fuel? – A. Fuel Price will stay the same – B. Demand for fuel will increase – C. Demand for fuel will decrease – D. Fuel Price will increase

■Population –Population Demand Determinants of Demand

Demand Elasticity ■The extent to which a change in price causes a change in quantity demanded. –For most goods consumers care about changes in price. –Tells how sensitive consumers are to changes in price. –How much consumers change Q in relation to changes in P Elasticity of Demand = % change in Q Demanded % Change in Price

Demand Elasticity ■Elastic Demand –A change in price causes a large change in quantity demanded. –ex: candy ■Inelastic Demand –A change in price causes a small change in quantity demanded. –ex: Medicine

Review Question (1/2) ■What is the definition of scarcity? – A. Unlimited wants, limited resources – B. Limited wants, unlimited resources – C. Limited wants, limited resources – D. Unlimited wants, unlimited resources

Review Question (1/2) ■Jackson hasn't missed a day of work since he turned 16 and got a job. Today, he made the decision to quit working to attend college. His sister Lisa teases him because he won't have spending money for four years. She also works full time, and at this point, she has no intention of going to college. ■ Based on the passage, what is Jackson's opportunity cost? – A. money he earns from a better career after he graduates – B. money he would have earned during his degree program – C. the degree he will earn if he stays in college – D. the teasing he puts up with from his sister

Law of Supply ■Supply: Amount of a product that would be offered for sale at each possible price in the market. ■Law of Supply –If P then Q (Where P = price and Q = Quantity supplied) –This gives us a direct relationship, why?

■Supply Schedule –Table showing quantities supplied at a particular price

Supply Curve ■As the price of a good increases, the quantity supplied of the good increases, and as the price of the good decreases, the quantity supplied of the good decreases. –If P then Q (Where P = price and Q = Quantity supplied) Remember: supply is the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period.

Change (∆) in Supply vs. Change (∆) in Quantity Supplied ■∆ in supply= a shift caused by a determinant (an influencing factor) of supply ■∆ in Quantity Supplied = a change along the supply curve caused by change in price. Supply = the ENTIRE cure Quantity supplied = a POINT on the curve

Shifts (Change / ∆) in Supply& Determinants of Supply ■Causes of increases or decreases in supply: –Cost of Resources –Technology and Productivity –Taxes and Subsidies –Producers price expectations – # of firms in the industry

Determinants of Supply ■Cost of Resources –Cost Supply ■Technology & Productivity –TechnologySupply

Determinants of Supply ■Taxes and Subsidies –Taxes Supply ■ –SubsidySupply

Determinants of Supply ■Producers Price Expectations –Price ExpectationsSupply ■Number of Firms in the Industry –#Supply

Warm-up ■What are the determinants of demand? ■What are the determinants of supply? ■What is the difference between a change in quantity demanded and a shift in demand? ■What is the difference between a change in quantity supplied and a shift in supply?

Supply and Demand Together ■Shortage –Quantity Demanded > Quantity Supplied ■Surplus –Quantity Demanded < Quantity Supplied ■Equilibrium –Market Clearing Price aka Equilibrium Price When you have a surplus a price floor exists, and causes the price to drop When you have a shortage a price ceiling exists, and causes the price to increase

Price Controls ■Sometimes the government prevents markets from reaching equilibrium price. ■It may do so by setting a Price Ceiling or a Price Floor.

Price Controls (Floor) ■A price floor is a miniumum price, set by the government, that must be paid for a good or service. –Ex: Minimum wage ■Price ceilings and price floors have the unintended result of reducing the amount of trade in the economy.

Price Elasticity of Supply (Sensitivity to Price) ■High price elasticity: change in price greatly affects consumer demand ELASTIC –Ex. Cereal, hot dogs, shoes ■Low price elasticity: change in price has little effect on consumer demandINELASTIC –Ex. Dentist, gasoline, medicine

Review Question ■Equilibrium in a market means which of the following? – A. the point at which quantity supplied and quantity demanded are the same. – B. the point at which unsold goods begin to pile up. – C. the point at which suppliers begin to reduce prices. – D. the point at which prices fall below the cost of production

Review Question ■The governments price floor on low wages is called the – A. market equilibrium – B. base wage rate – C. minimum wage – D. employment guarantee

The Organization and Role of Business ■Sole Proprietorship –Simplest form; Owned by an individual or household; Most common business in US ■Advantages: flexibility, direct interaction between consumers and owners, quick business decisions, easiest to start up, being your own boss. ■Disadvantages: unlimited liability, limited life, usually have limited funds (possible loans)

Organization and Role of Business ■Partnership – two or more people, share the risks/profits Common examples: law firms, doctors offices, & accounting firms. ■Advantages: can raise more money, combine expertise, fairly easy to start up ■Disadvantages: tough to reach decisions, potential conflict, legality of dissolving the partnership, all partners are responsible.

■Corporation –Separate legal entity –Owned by shareholders –Shareholders buy stock (share of ownership) –Corporations sell their stock on the stock market (ex-NYSE) for investment –Stocks can go up and down depending on the economy Organization and Role of Business

Corporation (Cont.) ■Advantages: limited liability, raising money (selling stocks and bonds), unlimited life ■Disadvantages: double taxation, internal conflict between owners and little say

■Franchise: –Person(s) purchase the local rights to a corporation ex. McDonald’s, Chick-fil-a, Zaxby’s, etc. –Pay a license fee and contractual agreement (must do things a certain way) Organization and Role of Business

■Think about COMPETITION –How do you face competition in your everyday life? –How can we apply competition in Economics?

Competition ■Competition creates lower prices for consumers, less profit for producers, and better products. ■Types of Competition: –Pure competition –Monopolistic competition –Oligopolies –Monopolies

Types of Competition ■Pure Competition: –1. large number of sellers –2. same quality of products –3. no major barriers –4. free exchange of price ■Monopolistic Competition: –1. only real difference is price –2. similar product, but not identical Examples: Shoes, Fast food, gas stations

Types of Competition ■Oligopolies: –1. only a few firms (2-12) –2. high barriers to entry –3. must be aware of other prices ■Monopolies –1. one firm –2. little to no competition –3. higher prices Examples: Car industry, cereal, soft drinks, and tire industry Examples: public utilities