Happy Monday! Take out your class notes! Due to scarcity, resources are limited. We can’t all have whatever we want, whenever we want. How does a country like the U.S. decide who is going to get what? Take out your class notes!

AP Microeconomics Curriculum Unit 2: Supply and Demand (15–20%) Market equilibrium Determinants of supply and demand Price and quantity controls Elasticity Consumer surplus, producer surplus, and allocative efficiency Tax incidence and deadweight loss

Today’s LEQ: How do markets operate?

Economic Systems Economic systems address scarcity What, how, and for whom to produce? U.S. = mixed market economy Producers/Consumers (& limited gov’t) answer these questions

Markets The market is the most important economic institution in a market economy Exist when buyers and sellers interact Can be local, national, or international This interaction determines prices & therefore allocates scarce goods and services

Market Incentives Prices send signals and provide incentives to buyers and sellers What would happen if the price of the average flat screen TV jumped to $30,000? When supply or demand changes, market prices adjust, affecting incentives For example, what happened when the price of gas exceeded $4.00 a gallon? Laugh if you get this joke… PLEASE.

Graphing Supply Law of Supply: When price increases (decreases), the quantity supplied increases (decreases)

Graphing Demand Law of Demand: When price increases (decreases), quantity demanded decreases (increases)

Equilibrium Price (Market Clearing Price) The market settles at this price and quantity QS = QD Why? At this point of intersection, buyers and sellers agree on both price and quantity

Game Time! “A Classroom Market for Crude Oil” Half of you will be buyers of barrels of crude oil, half of you will be sellers

To Win: DO NOT REVEAL THE PRICE ON YOUR CARD AT ANY TIME! Buyers: try to buy a barrel of crude oil at the lowest possible price. You should not buy for more than the price on your card. Sellers: try to sell a barrel of crude oil at the highest possible price. You should not sell for less than the price on your card.

A few things worth mentioning… Any buyer can interact with any seller. Goal of both buyers and sellers is to make as much money as you can. You are free to make as many transactions in a round as time permits. All transaction prices must be made in whole dollar increments. When a transaction is made, both the seller and the buyer report the agreed upon price to the recorder. HINT: Watch the tally sheet so you know what prices are being paid for oil... After each transaction, turn in your card and receive a new one, reenter the marketplace, and resume

Game Recap At what price was crude oil most frequently sold in each round? In which round did the greatest spread of prices occur? Why did the prices become more clustered in later rounds? Did buyers and sellers determine the final price for crude oil? How did competition among sellers and buyers influence price?

Activities 4 & 5 Construct the graph by placing dots at the points that correspond to all the combination of prices and quantities shown in the supply schedule on Activity 4 Do the same, but use small crosses instead of dots, for the demand schedule Connect the dots to produce the supply schedule Connect the crosses to produce the demand schedule Label each curve

Surplus If price is above the equilibrium price, sellers would want to sell more than buyers would want to buy QS > QD

Shortage If price is below the equilibrium price, buyers would want to buy more than sellers would want to sell QD > QS

Complete Activity 6 What is the market clearing price for bananas? In the marketplace, how will this price be determined? Remember, the store managers try to sell their bananas at 89 cents per pound? Describe an example of a surplus or a shortage that you have experienced in the marketplace, or that you have read about or heard about from someone else.

Today’s Exit Ticket On scratch paper, answer today’s LEQ: How do markets operate? Be sure to use all of the key vocabulary listed below: Demand, Market, Equilibrium, Shortage, Supply, Surplus