Unit 2: Microeconomic Concepts The Market at Work: Understanding Supply, Demand, and Market Structures

The Circular Flows in a Market Economy

The Circular Flows in a Market Economy with Government

A Description of Production Natural resources are transformed by human and capital resources into goods and services. Thus, human and capital resources do the work of production, while natural resources provide the material that they transform. Because human and capital resources require energy to work, natural resources also provide the energy required for these resources (i.e., food for workers and fuel for machines).

Productive Resources Human resources People: the mental and physical abilities that allow them to make contributions in the workforce. Examples: construction workers, factory workers, teachers, doctors, truck drivers, farmers, secretaries, actors, engineers, garbage collectors, and many other occupations

Productive Resources Capital resources Goods that were specifically produced in order to produce other goods. Examples: machines, equipment, tools, office and factory buildings, tractors, assembly lines, computers, grinders, trucks, and many other things that help in the production process

Productive Resources Natural resources An actual or potential form of wealth extracted or harvested from the natural environment. Examples: trees, fish, soil, minerals (such as copper, aluminum, iron ore, gold, and zinc), air, water, fossil fuels (such as coal, oil, and natural gas), as well as the space provided by a plot of land

The Role of Money How would you obtain something you want without using money?

Why Money? 1. Medium of Exchange: ◦ used to determine the value during the exchange of goods and services ◦ alternative to barter 2. Unit of Account: ◦ allows you to compare the value of goods and services 3. Store of Value: ◦ keeps if you decide to hold on to it

Characteristics of Money 1. Durability ◦ can be used over and over again 2. Portability ◦ can be taken with you 3. Divisibility ◦ can be broken into smaller denominations 4. Uniformity ◦ two units are the same and can be counted 5. Limited Supply ◦ why it has value 6. Acceptability ◦ Has value to others & accepted for exchange

The Law of Demand States that there is an INVERSE relationship between price and quantity demanded… If Price increases, Quantity Demanded decreases PQ If Price decreases, Quantity Demanded increases PQPQ

Demand vs. Quantity Demanded Demand is the amount of a good and service that a consumer is willing and able to buy at various possible prices during a given time period ◦ How many will you buy altogether? Quantity Demanded is the amount a consumer is willing and able to buy at each particular price during a given time period ◦ How many will you buy at a specific price? CONSUMERS DRIVE BOTH!!!!

Representing Quantity Demanded Demand Schedules – table that shows the relationship between demand and price of a given product Demand Curves – graph where the x- axis represents the quantity demanded from a given product and the y-axis represents various prices  Demand Curves slope DOWNWARD

The Demand Schedule…

The Demand Curve… DOWNWARD SLOPING!!!! (p) P r i c e Quantity Demanded(q)

Factors Impacting Demand Economists focus on the quantity bought: Income Effect ◦ Impacts consumers due to rising prices ◦ consumers cut back on quantity demanded may change at all prices due to limited budgets ex. You have typically purchase 3 pieces of pizza for lunch at $2.00 each – if your income goes down, you may only be able to buy 2

Factors Impacting Demand (cont.) Substitution Effect ◦ Consumers will buy less of one product and more of another if its price becomes higher relative to similar products ex. You typically like to buy a Chick-fil-a sandwich for $3.00. If the chicken sandwich jumps to $6.00, you might decide to buy a quarter pounder at McDonalds that still costs $3.00  the opposite is also true

Factors Impacting Demand Diminishing Marginal Utility ◦ Def. – as more units of a product are consumed, the satisfaction or usefulness/utility received from the product eventually decreases. Therefore, demand decreases (or diminishes) ◦ Ex. Marshmallow Demonstration

The Market Never Stands Still (Demand) The ENTIRE demand curve can shift ◦ This is different than changes in price that impact quantity demanded – it shifts overall demand  Changes that INCREASE overall demand shift the curve to the right  Changes that DECREASE overall demand shift the curve to the left

(p) P r i c e Quantity Demanded(q) Decreased Demand at All Prices -Shifts Left

Increased Demand at All Prices- Shifts Right (p) P r i c e Quantity Demanded(q)

Determinants of Demand Factors that shift the curve 1)Change in consumer income 2)Change in consumer taste 3)Change in the price of a SUBSTITUTE GOOD 4)Change in the price of a COMPLEMENTARY GOOD 5)Change in consumer price expectations 1)What we expect to happen in the future 6)Change in the number of consumers in the market

Substitutes and Complements Substitute Goods ◦ If the price of Chick-fil-a sandwich increases, quantity demanded would decrease, but overall demand for burgers at all prices might increase ◦  Demand for burgers at all prices shifts burger demand curve to the right Complementary Goods ◦ If cost of peanut butter rises, demand for jelly would decrease and shift its curve to the left

Shifts in Demand Demand price Quantity of pecans per day

Make the Connection… There is an Opportunity Cost for consumer buying decisions – Why? ◦ The higher the price the greater the opportunity cost (and vice versa) ◦ There is also an opportunity cost associated with the substitution effect  WHY????

Law of Supply States that there is a direct relationship between quantity supplied by producers and price… If Price increases, Quantity Supplied increases PQ If Price decreases, Quantity Supplied decreases P Q

Supply vs. Quantity Supplied Similar to distinctions related to demand ◦ Supply represents the total amount of goods available at various possible prices. ◦ Quantity Supplied refers to the amount of a good available at a particular price.

Representing Quantity Supplied Supply Schedule (same idea as demand schedule) – shows the relationship between price and quantity supplied Supply Curve – Price is ALWAYS on Y- Axis & Quantity supplied on X-Axis ◦ graph slopes upward (positive)

Supply Graph UPWARD SLOPING!!!! (p) P r i c e Quantity Supplied(q)

Shift/Change in Supply Factors cause a shift of the entire Supply Curve ◦ This is different than changes in price that impact quantity supplied – it shifts overall supply  Changes that INCREASE overall supply shift the curve to the right  Changes that DECREASE overall supply shift the curve to the left

Determinants of Supply  Causes of shifts… 1. Changes in Cost of Factors of Production (price of inputs changes) 2. Change in Profit Opportunities 3. Change in Market Price Expectations 4. Change in Number of Sellers in a Market 5. Change in Technology

(p) P r i c e Quantity Supplied(q) Decreased Supply – Shift Left

(p) P r i c e Quantity Demanded(q) Increased Supply – Shift Right

Why Inputs Impact Supply Increasing Marginal Returns ◦ Def. – through specialization, producers can increase returns (revenue) for each additional worker it adds. Diminishing Marginal Returns ◦ Def. – producers cannot add workers due to the availability of capital resources.   eventually the # of workers will exceed the work that is available  Returns/Revenue go down

Putting it Together The price point in which quantity demanded and quantity supplied meets is called MARKET EQUILIBRIUM Why? Producers want the highest price possible & consumers want the lowest price possible

Market Equilibrium (q) (p) MARKET EQUILIBRIUM

Equilibrium – Where Supply and Demand Meet Also known as the Market-Clearing Price ◦ Why? Initially  Quantity Demanded, Quantity Supplied and Equilibrium assume that all variables remain constant (income, quality of the good, etc.)

A Key Question What do you think will happen if you shift demand, supply, or both?

(p) P r i cD 1 e D 2 Quantity (q) Demand Shift Changes Equilibrium Price

S 2 (p)S 1 P r i c e Quantity (q) Supply Shift Moves Equilibrium Price

Putting it All Together What is the whole purpose of examining supply curves with demand curves together in order to determine equilibrium?

The Answer… They are used to illustrate how the market determines… PRICE

Thinking About the Market The market always seeks the market- clearing price ◦ Price below equilibrium = SHORTAGE ◦ Price above equilibrium = SURPLUS

Determining Price Outside of the Market Market does not reach equilibrium due to government intervention ◦ Price Controls – occur when a local, state, or national government decide a legal minimum/maximum for a good or service… 1.Price Floors 2.Price Ceilings

Price Floors A legal MINIMUM price for a good, service, or factor of production ◦ Charging BELOW that price is illegal and can carry a penalty under law (Ex. Minimum Wage) ◦ Set ABOVE equilibrium ◦ Surpluses result because producers are willing to produce more than consumers are willing to consume

Price Floor (q) (p) MARKET EQUILIBRIUM Price Floor S1S1 B D1D1 A

Price Ceilings A legal MAXIMUM price for a good, service, or factor of production ◦ Set below equilibrium price ◦ Charging ABOVE that price is illegal and can carry a penalty under law (ex. Rent Control) ◦ Causes Shortages  Market can’t reach equilibrium price  Consumers demand is greater than producers are willing/able to provide  Creates potential for a black market

Price Ceiling (q) (p) MARKET EQUILIBRIUM Price Ceiling S1S1 B D1D1 A

Ceiling and Floor Together (q) (p) MARKET EQUILIBRIUM Price Floor Price Ceiling S1S1 D1D1 A B E F

Black Market Why might a price ceiling cause a black market?

Article Analysis 1. What is the article about? 2. What is the point-of-view of the author/writer? 3. What is the purpose of the action that is discussed? 4. What effect does it/will it have on the economy? 5. Do you agree or disagree? Why????

PRICE ELASTICITY Price Elasticity of Demand – the responsiveness of consumers to changes in price Price Elasticity of Supply – the responsiveness of producers to changes in price

ELASTICITY OF DEMAND Demand is INELASTIC when the percentage change in the price of a good is greater than the percentage change in quantity demanded for that good. Demand is ELASTIC when the percentage change in the price of a good is less than the percentage change in the quantity demanded of that good.

INELASTIC DEMAND (q) (p)D 1 Relatively Inelastic Demand

INELASTIC DEMAND (q) (p)D 1 Perfectly Inelastic Demand

ELASTIC DEMAND D 1 (q) (p) Relatively Elastic Demand

ELASTIC DEMAND D 1 (q) (p) Perfectly Elastic Demand

ELASTICITY OF SUPPLY Supply is INELASTIC when the percentage change in the price of a good is greater than the percentage change in the quantity supplied for that good. Supply is ELASTIC when the percentage change in the price of a good is less than the percentage change in the quantity supplied for that good.

INELASTIC SUPPLY (q) (p) S 1 Relatively Inelastic Supply

INELASTIC SUPPLY (q) (p) S 1 Perfectly Inelastic Supply

ELASTIC SUPPLY S 1 (q) (p) Relatively Elastic Supply

ELASTIC SUPPLY S 1 (q) (p) Perfectly Elastic Supply

Forms of Business Organization You’ve decided to go into business for yourself. How would you organize your new business? Would you start a… 1.Sole Proprietorship 2.Partnership 3.Corporation

Business Organization Characteristics to Consider: Who owns it? How common is it? Advantages/Disadvantages to Consider: Who gets to keep the profit? Who makes the decisions? How easy it to start? Who has the liability-would it be limited or unlimited? How much potential is there for conflict? What potential does it have for longevity? Is specialization possible/realistic? How much government oversight would there be?

Forms of Business Organization See Provided Graphic Organizer

Key Concepts of Business Organization Unlimited Liability: one’s personal assets can be seized to pay business debts. Limited Liability: owners of the corporation cannot lose more than what they paid for the stock if the corporation fails. Limited Life: the death of an owner ends the business. Double Taxation: when the company is taxed on its profits & the shareholders are then taxed on dividends.

Types of Market Structures See provided graphic organizer ◦ See questions to consider when identifying characteristics

Questions to Consider Number of Sellers ◦ Are there many, few, or one seller of a product? Price-Setting Power ◦ Can the individual businesses in the market for a product have any control over the price? Product Differentiation ◦ Is there any difference between the products sold by the sellers in the market for the good? Non-Price Competition ◦ Can the firms in the market use methods other than price to attract customers? Barriers to Entry ◦ Are there any obstacles the prevent other firms from entering the market for good?

S 2 (p)S 1 P r i cD 1 e D 2 Quantity (q) Equilibrium Shift – Supply and Demand