1. 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?

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

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

4. 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

5. 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

6. 1776
12/5/2018
7 Market System

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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

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

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

17. 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

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

19. Socialism
Redistribution of wealth
Often through taxation

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

21. The Process of Price Determination

22. COMPETITION IS THE REGULATOR
It constrains buyers and sellers.

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

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

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

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

27. Competition determines the Equilibrium Price
Quantity
SUPPLY
For
Sale
Demand

28. 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

29. About the buyers

30. Influences on the sellers

31. 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

32. 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

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

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

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

36. 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.

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

38. 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.

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

40. 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

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

42. 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