Review with your partner the market simulation that we did last week Review with your partner the market simulation that we did last week. What did you learn? What is the bigger picture?

Economic Systems The way a country or society structures production and consumption and goods and services 12/5/2018

Profit and Competition The Market System Profit and Competition 12/5/2018

Because of scarcity, someone will always be told NO! The trick is to get as much as possible from scarce resources. What are the most efficient systems of production and exchange? 12/5/2018 7 Market System

Different methods of production and exchange Tradition -There is no need for success; you do what your parents did. Command – You do as you’re told. The market - You do what is in your best interests and by so doing, provide the material wants of society; incentives are the key. 12/5/2018 7 Market System

1776 12/5/2018 7 Market System

ADAM SMITH (1723 - 1790) Profit is the motivator, competition is the regulator. 12/5/2018 7 Market System

Profit is the Motivator “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.” 12/5/2018 7 Market System

Competition is the Regulator “If he charges too much for his wares, or if he refuses to pay as much as everybody else for his workers, he will find himself without buyers in the one case, and without workers in the other.” 12/5/2018 7 Market System

Laissez-Faire Literally means “let do” Implies, “let it be” or “leave it alone” Free from government intervention 12/5/2018 7 Market System

The Invisible Hand (self-interest and competition): rewards efficient producers and buyers results in: goods society wants quantity society wants prices society is willing and able to pay normal profits 12/5/2018 7 Market System

The Entrepreneur: the driver of the market system. combines resources to produce a product takes the risks associated with innovation the “residual claimant” 12/5/2018 7 Market System

Why the market? Scarcity exists Societies must find a way to allocate scarce goods and services In any allocative mechanism, some people will be told “No.” The market system is efficient, but… Neither markets nor other economic systems are “fair.” 12/5/2018 7 Market System

Main Points In a market system, profit is the motivator and competition is the regulator. The entrepreneur is the driver of the market system. The market system is efficient; neither it, not other economic systems are “fair.” 12/5/2018 7 Market System

Command Economy Economic system controlled by the central government 12/5/2018 7 Market System

What type of economy does the U.S. employ Command Market Mixed 12/5/2018 7 Market System

Capitalism A system in which private citizens own most, if not all, of the means of production and decide how to use them within legislated limits 12/5/2018 7 Market System

Communism A system in which government owns industries Less or no private industry 12/5/2018 7 Market System

Socialism Redistribution of wealth Often through taxation

Market: An interaction of buyers and sellers 12/5/2018 7 Market System

The Process of Price Determination

COMPETITION IS THE REGULATOR It constrains buyers and sellers.

Buyers want the lowest possible price, but.... Quantity For Sale DEMAND

they have to compete against all other buyers. Price Quantity For Sale

Sellers want to charge the highest price possible, but ...... Quantity For Sale Supply

they have to compete against all other sellers. Price Quantity Supply For Sale

Competition determines the Equilibrium Price Quantity SUPPLY For Sale Demand

How are prices determined? Buyers competing against each other drive the price up Sellers competing against each other drive the price down Equilibrium Price is determined by the impersonal forces of supply and demand

About the buyers

Influences on the sellers

Reservation Prices Sellers Buyers Supply price The lowest price that a seller is willing and able to accept for a particular quantity of a particular product Buyers Demand price The highest price that a buyer is willing and able to pay for a particular quantity of a particular product

At the equilibrium price Buyers who are able and willing to pay the price get the goods and services they desire Sellers who are able to produce at that price sell all that they wish There are neither surpluses nor shortages Not all prospective buyers or sellers are satisfied

Relative Prices Income = $30,000 $40 $10 $20

Relative Prices Have Not Changed Income = $30,000 Income = $60,000 $40 $80 $10 $20 $20 $40

Supply – a relationship Price Quantity Supplied $10 5 $9 4 $8 3 $7 2 $6 1 $5 $4 $3 $2 $1

The Law of Supply Once all other factors have been considered, the quantity supplied of a product varies directly with the price of the product. If the price rises, the quantity supplied will rise; if the price falls, the quantity supplied will fall.

Demand – a relationship Price Quantity Demanded $10 $9 $8 1 $7 2 $6 3 $5 4 $4 5 $3 6 $2 7 $1 8

The Law of Demand Once all other factors have been considered, the quantity demanded of a product varies inversely with the price of the product. If the price rises, the quantity demanded will fall; if the price falls, the quantity demanded will rise.

Determinants of Price Elasticity of Demand availability of substitutes percentage of income time

Equilibrium Price and Quantity Exchanged Quantity Supplied Quantity Demanded $10 5 $9 4 $8 3 1 $7 2 $6 $5 $4 $3 6 $2 7 $1 8

The Equilibrium Price Quantity supplied equals quantity demanded No shortages or surpluses The market clears Scarcity is not eliminated The measure of relative scarcity

Main Points Buyers and sellers (demand and supply) determine equilibrium price and quantity exchanged. At the equilibrium price, the number of items that sellers are willing and able to offer for sale equals the number of items that buyers are willing and able to purchase. Relative scarcity is the relationship of supply and demand. Price is the measure of relative scarcity