1. Unit 3: Microeconomic Concepts
The Market at Work:
Understanding Supply, Demand, and Market Structures

2. Standards
SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. a. Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money. b. Explain the role of money as a medium of exchange. SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy. a. Define the Law of Supply and the Law of Demand.

3. The Circular Flows in a Market Economy

4. The Circular Flows in a Market Economy with Government

5. A Description of Circular Flow Model
A simple economic model illustrating the flow of goods and services though the economy.
Households provide productive resources to businesses in exchange for income in the resource market
Businesses/Firms provide finished goods/services to households in exchange for revenue in the product market
Money circulates between businesses and households in the model

6. Role of Money in the Market
Medium of Exchange:
Its value allows the flow of goods between producers and consumers
alternative to barter
It is portable
It is divisible
Unit of Account:
Easier to assign values and compare
Store of Value:
keeps its value over time

7. Standards
SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy. a. Define the Law of Supply and the Law of Demand. d. Explain how prices serve as incentives in a market economy. SSEMI3 The student will explain how markets, prices, and competition influence economic behavior. a. Identify and illustrate on a graph factors that cause changes in market supply and demand.

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

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

10. Demand vs. Quantity Demanded
Demand is the amount of a good or 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!!!!

11. 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.

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

13. 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)

14. The Demand Schedule…

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

16. Catherine’s Demand Schedule17

17. Figure 1 Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of 2.
...
increases quantity
of cones demanded.
Ice-Cream Cones
Copyright © South-Western

18. MARKET VS. INDIVIDUAL DEMAND
Each consumer has his individual demand curve for a product
The market demand curve for that product is the sum of all of the individual demand curves

19. Supply Schedule

20. Supply Curve
UPWARD SLOPING!!!!
(p) P r i c e
Quantity Supplied (q)

21. Ben’s Supply Schedule
Supplied 29

22. Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Supplied
Cone
$3.00
2.50
1. An
increase
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream Cones 2.
...
increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning

23. MARKET VS. INDIVIDUAL SUPPLY
Each producer has his own individual supply curve
The market supply curve is the sum of all the individual supply curves

24. Standards
SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy. a. Define the Law of Supply and the Law of Demand. d. Explain how prices serve as incentives in a market economy. SSEMI3 The student will explain how markets, prices, and competition influence economic behavior. a. Identify and illustrate on a graph factors that cause changes in market supply and demand.

25. Factors Impacting Demand
Economists focus on the quantity bought:
Income Effect: change in consumption resulting from a change in income.
With an increase in income, a good becomes less expensive relative to your income, so you buy more of that good
With a decrease in income, a good becomes more expensive relative to your income, so you buy less of that good

26. 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 $ If the chicken sandwich jumps to $6.00, you might decide to buy a quarter pounder at McDonalds that still costs $3.00

27. Make Connections… There is always an Opportunity Cost for what we buy
Why? Because buying more of one good means we buy less of another

28. The Market Never Stands Still: Shifting Demand
Changes in price only impact quantity demanded – just a different point on the curve
Changes in price NEVER shift the demand curve
Only changes in OVERALL demand shift the ENTIRE demand curve
Changes that INCREASE overall demand shift the curve to the right
Changes that DECREASE overall demand shift the curve to the left

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

30. Decreased Demand at All Prices -Shifts Left
Quantity Demanded (q)

31. Determinants of Demand: Causes of Shifts
Changes in:
Consumer income
Consumer taste & preference
Price of a substitute good
Price of a complementary good
Number of consumers in the market
Consumer future price expectations
the impact of what we EXPECT to happen in the future on our “right now” graph

32. Substitutes
Substitute Goods: two goods that could be used for the same purpose
If the price of Good B increases relative to Good A (a substitute), Demand for Good A increases – Good A’s curve shifts right
If the price of Good B decreases relative to Good A (a substitute), Demand for Good A decreases – Good A’s curve shifts left

33. Complements
Complementary Goods: A good or service that is used in conjunction with another good or service
If the price of Good B decreases, demand for Good A (a complement) will increase and Good A’s curve will shift right
If the price of Good B increases, demand for Good A (a complement) will decrease and Good A’s curve will shift left

34. Shifts in Demand
Demand price
Quantity of pecans per day

35. The Market Never Stands Still: Supply
Changes in price only impact quantity supplied– just a different point on the curve
Changes in price NEVER shift a supply curve
Changes in OVERALL supply shift the ENTIRE supply curve
Changes that INCREASE overall supply shift the curve to the right
Changes that DECREASE overall supply shift the curve to the left

36. Determinants of Supply: Causes of Shifts
 Changes in…
Resource Costs (inputs)
Profit Opportunities for Other Goods
Future Price Expectations
Number of Sellers in a Market
Change in Technology

37. Decreased Supply – Shift Left
Quantity Supplied (q)

38. Increased Supply – Shift Right
Quantity Demanded (q)

39. Standards
SSEMI3 The student will explain how markets, prices, and competition influence economic behavior.
c. Define price elasticity of demand and supply.

40. Consumer Responsiveness
What determines what quantity of a good or service we are willing to buy?
Are there goods or services that we would buy a lot less of if the price were to rise? Why? Examples…
Are there are goods or services that we would still buy the same amount of even if the price changed? Why? Examples?

41. PRICE ELASTICITY
Price Elasticity of Demand – the responsiveness of consumers to changes in price – how much the quantity demanded changes if the price changes
Price Elasticity of Supply – the responsiveness of producers to changes in price – how much the quantity supplied changes when the price changes

42. 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.
% change of P or > % change in Quantity demanded

43. ELASTICITY OF DEMAND
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.
% change of P or < % change in Quant. demanded

44. Influencers of Demand Elasticity
Goods are…
More elastic when there are substitutes available
More inelastic when a good is a necessity
More elastic when a good is a luxury
THE GREATER THE IMPORTANCE THE LESS ELASTIC

45. RELATIVELY INELASTIC DEMAND
(p) D1
(q)
Relatively Inelastic Demand

46. PERFECTLY INELASTIC DEMAND
(p) D1
(q)
Perfectly Inelastic Demand

47. RELATIVELY ELASTIC DEMAND
(p)
D1 (q)
Relatively Elastic Demand

48. PERFECTLY ELASTIC DEMAND
D1 (q)
Perfectly Elastic Demand

49. 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.
% change P or > % change in Quantity Supplied

50. ELASTICITY OF SUPPLY
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.
% change P or < % change in Quantity Supplied

51. INELASTIC SUPPLY
(p) S1
(q)
Relatively Inelastic Supply

52. INELASTIC SUPPLY
(p) S1
(q)
Perfectly Inelastic Supply

53. ELASTIC SUPPLY
(p)
S1 (q)
Relatively Elastic Supply

54. ELASTIC SUPPLY
(p)
S1 (q)
Perfectly Elastic Supply

55. Supply and Demand Together
The price point in which quantity demanded and quantity supplied meets is called MARKET EQUILIBRIUM
Why is an equilibrium necessary?
Producers want the highest price possible & consumers want the lowest price possible
THE MARKET ALWAYS SEEKS EQUILIBRIUM

56. Equilibrium – Where Supply and Demand Meet
Called the Market-Clearing Price
Why?
Quantity Demanded = Quantity Supplied Yields Equilibrium Price
assumes all variables remain constant
(income, quality of the good, etc.)

57. QD = Qs is Market Equilibrium
(p)
(q)
QD = Qs is Market Equilibrium
MARKET EQUILIBRIUM

58. Changes in Supply and Demand
A demand shift can cause a change in the equilibrium price and quantity
A supply shift can also cause a change in the equilibrium price and quantity

59. Demand Shift Changes Equilibrium Price and Quantity
c D1
e D2
Quantity (q)

60. Supply Shift Changes Equilibrium Price and Quantity
(p) S1 P r i c e
Quantity (q)

61. Supply and Demand Shifting Together May or May Not Shift Equilibrium Price and Quantity
(p) S1 P r i
c D1
e D2
Quantity (q)

62. Shifting Equilibrium Examples
Market #1: Coal
News event: Due to a lack of rail cars, coal becomes difficult to transport from the mines.
Decrease in supply
Market #2: Powdered milk
News event: Families substitute powdered milk for fresh milk because the latter must be kept cool by ice, and ice prices have increased, causing the price of milk to rise.
Increase in demand

63. Shifting Equilibrium Examples
Market #3: Residential rental space in Boston
News event: A destructive fire in Boston has left many citizens homeless.
Increase demand & Decrease supply
Market #4: Bread
News event: Higher grain prices increase the cost of making bread.
Less supply

64. Standards…
SSEMI3 The student will explain how markets, prices, and competition influence economic behavior.
a. Identify and illustrate on a graph factors that cause changes in market supply and demand.
b. Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.

65. Disequilibrium
The market ALWAYS seeks the market- clearing price where goods sell out
When it is not in equilbrium
Price below equilibrium = SHORTAGE
Price above equilibrium = SURPLUS

66. Disequilibrium
If the market always seeks equilibrium, why might a market operate at a price that is not at equilibrium?

67. Price Controls
Price Controls – occur when a government or force outside the market decides to impose a legal minimum/maximum price for a good or service…
Market does not reach equilibrium due to government intervention
These result in one of two things:
Price Floors
Price Ceilings

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

69. Price Ceilings
A legal MAXIMUM price for a good, service, or factor of production
Set below equilibrium price
Charging ABOVE that price is illegal (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…Why?

70. Price Floor
(p)
(q) S1
Price Floor A B
MARKET EQUILIBRIUM D1

71. Price Ceiling
(p)
(q) S1
MARKET EQUILIBRIUM
Price Ceiling A B D1

72. SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy.
a. Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.
b. Explain the role of profit as an incentive for entrepreneurs.
c. Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure

73. Forms of Business Organization
Businesses fall into one of three categories, each with unique advantages and disadvantages.
Sole Proprietorship
Partnership
Corporation
You’ve decided to go into business for yourself. How would you organize your new business?

74. 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 is it to start?
Who has the liability if the company fails?
How much potential is there for conflict in its management?
How long can it/will it last?
Is specialization possible/realistic?
How much is the government involved?

75. Types of Businesses Sole Proprietorship Partnership Corporation
Sole Proprietorship
Partnership
Corporation
General Characteristics
(ex. Who owns the business?)
Advantages
Disadvantages

76. 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.

77. Types of Market Structures
Businesses operate in one of four types of market structures
Market structures vary according to how much competition in their industry exists
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly

78. Questions to Consider Number of Sellers Price-Setting Power
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?

79. Your Opportunity
You and your partner have the opportunity to earn bonus points on the test.
Here are your options:

80. Point Options
If you steal the points and your partner splits the points, you get 10 points and your partner gets 1 point
If your partner steals the points and you split them, your partner gets 10 points and you get 1 point
If you both split the points, you each get 3 points
If you both steal the points, you both get 0 points

81. STOP HERE

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

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

84. Why Demand Curve Slopes Downward
Diminishing Marginal Utility:
As more units of a product are consumed, the satisfaction received from the product decreases, so quantity demanded decreases (or diminishes).
Ex. Marshmallow Demonstration

85. Why Inputs Impact Supply
Increasing Marginal Returns
through specialization, producers can increase returns (revenue) for each additional worker it adds.
Diminishing Marginal Returns
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