Section 1 The Marketplace In a market economy, buyers and sellers set prices.

Concept Trans 1

Section 1 The Marketplace (cont.) In a market economy, consumers collectively have a great deal of influence on prices of all goods and services. The demand of a good or service creates supply.demand supply A market represents the freely chosen actions between buyers and sellers.market

Vocab1 demand: the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period supply: the amount of a good or service that producers are able and willing to sell at various prices during a specified time period

Section 1 The Marketplace (cont.) In a market economy, individuals decide for themselves the answers to: –What? –How? –For Whom? What are these questions called? HINT, you learned it in chapter 1.

Section 1 The Marketplace (cont.) A market economy is based on the principle of voluntary exchange - a transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange.voluntary exchange

Activity

Section 1 The Law of Demand The law of demand states that as price goes up, quantity demanded goes down, and vice versa.

VS 1 The law of demand states that as price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up.

Section 1 The Law of Demand (cont.) Several factors explain the inverse relation between price and quantity demanded, or how much people will buy of any item at a particular price.quantity demanded –Real income effectReal income effect –Substitution effectSubstitution effect Factors include:

Vocab7 real income effect: economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same substitution effect: economic rule stating that if two items satisfy the same need and the price of one rises, people will buy more of the other

Section 1 The Law of Demand (cont.) Diminishing marginal utility: –Utility - the ability of any good or service to satisfy consumer wantsUtility - –Marginal utility - an additional amount of satisfactionMarginal utility - –Law of diminishing marginal utility - the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchasedLaw of diminishing marginal utility

A.A B.B C.C Section 1 Do you feel that the law of demand benefits you as a shopper? A.Always B.Sometimes C.Never

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Section 2 Graphing the Demand Curve A demand curve is a graph that shows the relationship between the price of an item and the quantity demanded.

Section 2 Graphing the Demand Curve (cont.) Economist can show the relationship between a change in quantity demanded and a change in demand using a demand curve. View: Graphing the Demand CurveGraphing the Demand Curve

Section 2 Graphing the Demand Curve (cont.) A demand schedule is a table reflecting quantities demanded at different possible prices.demand schedule A demand curve shows the quantity demanded of a good or service at each possible price. Demand curves slope downward, clearly showing the inverse relationship.demand curve

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Section 2 Determinates of Demand A change in the demand for a particular item shifts the entire demand curve to the left or right.

Section 2 Determinates of Demand (cont.) Factors that can affect demand for a specific product or service: –Changes in population –Changes in income –Changes in people’s tastes and preferences View: If Population IncreasesIf Population Increases View: If Income DecreasesIf Income Decreases View: If Preferences ChangeIf Preferences Change

Section 2 Determinates of Demand (cont.) –The availability and price of substitutes –The price of complementary goodscomplementary goods The decrease in the price of one good will increase the demand for its complementary. View: If Price of Substitute DecreasesIf Price of Substitute Decreases View: If Price of Complement DecreasesIf Price of Complement Decreases

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A.A B.B C.C D.D Section 2 A change in the demand of a product shifts the demand curve which way? A.Up and down B.Horizontally C.Left and Right D.Vertically

Section 2 The Price Elasticity of Demand Elasticity of demand measures how much the quantity demanded changes when price goes up or down.

Section 2 The Price Elasticity of Demand (cont.) For some goods, a rise or fall in price greatly affects the amount people are willing to buy. This economic concept is referred to as elasticity.elasticity The measure of how much consumers respond to a given change in price is referred to as price elasticity of demand.price elasticity of demand View: Demand vs. Quantity DemandedDemand vs. Quantity Demanded View: Goods with…Goods with…

Section 2 The Price Elasticity of Demand (cont.) elastic demand: situation in which a given rise or fall in a product’s price greatly affects the amount that people are willing to buy inelastic demand: situation in which a product’s price change has little impact on the quantity demanded by consumers View: Demand vs. Quantity DemandedDemand vs. Quantity Demanded View: Goods with…Goods with…

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A.A B.B Section 2 A vacation to Australia is an example of which type of demand? A.Elastic B.Inelastic

Section 3 Profits and the Law of Supply The law of supply states that as price goes up, quantity supplied goes up, and vice versa.

Section 3 Profits and the Law of Supply (cont.) To understand pricing, you must look at both demand and supply. –The higher the price of a good, the greater the incentive is for a producer to produce more. The law of supply states that as the price of a good rises, the quantity supplied also rises. As the price falls, the quantity supplied also falls.The law of supplyquantity supplied View: The Law of SupplyThe Law of Supply

Vocab20 quantity supplied: the amount of a good or service that a producer is willing and able to supply at a specific price

Section 3 The Supply Curve A supply curve is a graph that shows the relationship between price and quantity supplied.

VS 2 The law of supply states that as price goes up, quantity supplied also goes up. As price goes down, quantity supplied goes down.

Section 3 The Supply Curve (cont.) A supply schedule is a table showing quantities supplied at different possible prices.supply schedule The supply curve is an upward-sloping line that shows in graph form the quantities producers are willing to supply at each possible price.supply curve

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A.A B.B Section 3 According to the supply curve, what is the relationship between price and quantity supplied? A.Direct B.Inverse

Section 3 The Determinants of Supply A change in the supply of a particular item shifts the entire supply curve to the left or right.

Section 3 The Determinants of Supply (cont.) Many factors affect the supply of a specific product. Four of the major determinants are: –The price of inputs –The number of firms in the industry –Taxes imposed or not imposed View: If Inputs Become CheaperIf Inputs Become Cheaper View: If Number of Firms IncreasesIf Number of Firms Increases View: If Taxes IncreaseIf Taxes Increase

Section 3 The Determinants of Supply (cont.) –TechnologyTechnology Any improvement in technology will increase supply. View: If Technology Improves ProductionIf Technology Improves Production technology: the use of science to develop new products and new methods for producing and distributing goods and services Page 190

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A.A B.B C.C D.D Section 3 Which way will the supply curve shift if there is an increase in supply? A.Right B.Left C.Up D.Down

Section 3 The Law of Diminishing Returns When a business wants to expand, it has to consider how much expansion will really help the business.

Section 3 The Law of Diminishing Returns (cont.) Will product output continue to increase proportionally as more workers are hired? The law of diminishing returns shows that as more units of a factor of production are added to the other factors of production, after a certain point, the extra output for each additional unit hired will begin to decrease.The law of diminishing returns View: Supply vs. Quantity SuppliedSupply vs. Quantity Supplied View: Diminishing ReturnsDiminishing Returns

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Section 4 Equilibrium Price In free markets, prices are determined by the interaction of supply and demand.

Section 4 Equilibrium Price (cont.) Demand and supply operate together. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls (and vice versa). The point at which the quantity demanded and quantity supplied meet is called the equilibrium price. equilibrium price View: Equilibrium PriceEquilibrium Price View: Change in Equilibrium PriceChange in Equilibrium Price

VS 3 The point at which the quantity demanded and the quantity supplied meet is called the equilibrium price.

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Section 4 Prices as Signals Under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers.

Section 4 Prices as Signals (cont.) Rising prices signal producers to produce more and consumers to purchase less. Falling prices signal producers to produce less and consumers to purchase more. A shortage occurs when at the current price, the quantity demanded is greater than the quantity supplied.shortage Prices above the equilibrium price reflect a surplus to suppliers. (quantity supplied > quantity demanded at current price. surplus

Section 4 Prices as Signals (cont.) When a market economy operates without restriction, it eliminates shortages and surpluses. –When a shortage occurs, the price goes up to eliminate the shortage. –When surpluses occur, the price falls to eliminate the surplus.

A.A B.B C.C Section 4 If a company didn’t make enough of a certain shoe, and the demand for it was high, what would happen to the price? A.It would increase. B.It would decrease. C.It would stay the same.

Section 4 Price Controls Under certain circumstances, the government sometimes sets a limit on how high or low a price of a good or service can go.

Section 4 Price Controls (cont.) –Effective price ceilings, and resulting shortages, often lead to non-market ways of distributing goods and services such as rationing and leading to the black market.rationing black market A price ceiling is a government-set maximum price that may be charged for a particular good or service.price ceiling View: Price Ceilings and Price FloorsPrice Ceilings and Price Floors

Vocab29 rationing: the distribution of goods and services based on something other than price black market: “underground” or illegal market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold

Section 4 Price Controls (cont.) Conversely, a price floor, is a government-set minimum price that can be charged for goods and services.price floor

A.A B.B C.C Section 4 Do you feel that the government should be able to intervene in the market? A.Always B.Sometimes C.Never