Today’s LEQ: How do markets operate?

 The market is the most important economic institution in a market economy  Markets exist when buyers and sellers interact  This interaction determines prices & therefore allocates scarce goods and services

 Prices send signals and provide incentives to buyers and sellers  Think: 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  Think: What happens to gas prices around peak vacation times?

 Law of Supply:  When price increases (decreases), the quantity supplied increases (decreases) Market: Doughnuts

 Law of Demand:  When price increases (decreases), quantity demanded decreases (increases) Market: Doughnuts

 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 Market: Doughnuts

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

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

 Answer in your notes & be ready to share:  Imagine the equilibrium price for a can of tuna is $2.00. Bumblebee Tuna sets their price at $3.00 a can. Will this result in a shortage or surplus of tuna? How do you know?  Be sure to graphically represent your answer.

 Answer in your notes & be ready to share:  Imagine the equilibrium price for a can of tuna is $5.00. Bumblebee Tuna sets their price at $3.00 a can. Will this result in a shortage or surplus of tuna? How do you know?  Be sure to graphically represent your answer.

 Not all markets are ones in which price is allowed to move freely – government may set some price controls  Prices set by a law differ from the equilibrium price  This creates inefficiencies in the market as a shortage or surplus will always occur

PRICE CEILING (MAX. PRICE)  A shortage will always result  QS < QD  Price is set < Equilibrium  Inefficiencies: Consumer demand is not being met since price serves as a disincentive to producers PRICE FLOOR (MIN. PRICE)  A surplus will always result  QS > QD  Price is set > Equilibrium  Inefficiencies: Suppliers are wasting resources by producing too much

 Rules establishing price don’t change the basic rule that people act in their own best self-interest  However, new rules (price controls) may alter available options  Consumers may make different choices than what they would have in the absence of rules

 In your notes, justify why equilibrium is the most efficient place to be and be ready to share.

 Demand = the total amount consumers are willing and able to buy at all prices.  Demand Curve = the graphical representation of what consumers are willing and able to buy.

 Law of Demand: As price increases (decreases), quantity demanded decreases (increases). PQPQ

 Supply = the total amount of a good or service producers are able to make at all prices  Supply curve = the graphical representation of a good or service producers are able to make at all prices.

 Law of Supply: as price increases (decreases) quantity supplied increases (decreases) PQPQ

 Some factors cause supply and demand to shift; represented by the movement of the entire curve  Changes in QS or QD are represented by movement along the corresponding curve

 Tastes and fads  Income  Number of buyers  Future price expectations  Price and availability of:  Substitutes (i.e. Coke and Pepsi)  Compliments (i.e. peanut butter and jelly)

 Person A – complete side A  Explain your answer to Person B  Person B will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong  Person B – Complete side B  Explain your answer to Person A  Person A will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong  Alternate until all questions have been completed.

 Price of land, labor or capital (factors of production)  Technology  Number of other sellers  Price of other goods I could produce  Tax policy

 Person A – complete side A  Explain your answer to Person B  Person B will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong  Person B – Complete side B  Explain your answer to Person A  Person A will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong  Alternate until all questions have been completed.

“IRDL” will help you!  INCREASE = RIGHT  DECREASE = LEFT

 Scenario 1: The cast of the Jersey Shore passes away in a tragic airplane crash. What happens to the market for tanning oil?

 Scenario 2: The assembly line was developed and cars were manufactured much more efficiently than in the past.

 Failed his economic assignment (probably because he was in jail). Help him understand what he did wrong.

 In small groups, come up with a scenario that would cause either supply or demand to shift.  On poster paper, write down the scenario and draw the basic structure of the supply and demand graph making sure to label all of the following: Price, Quantity, Supply, Demand, Equlibrium  On a separate sheet of paper create an answer key that accurately shows the shift in supply or demand.

 Due at the start of our next class!!!

 Create a multiple choice test item for the state assessment that assesses the skills covered during our economics refresher today and yesterday. Create a problem with four answer choices, one that is correct and three that are incorrect. Make sure that the incorrect responses incorporate errors frequently made by students.