1. Unit 3 Markets: not just for fleas and stocks!

2. Specialization and Voluntary Exchange2

3. Specialization
Specialization: people/companies learn and practice a small set of skills then work or trade with others with different skills to produce something
Improves efficiency/productivity
The assembly line idea 3

4. Why does specialization work?
Skills are developed at a deeper level
people become “experts” in their field
Costs are cut because time needed to produce is decreased
Training can be more focused and in-depth
Remember: People, Stores & industries specialize 4

5. Examples of specialization
Doctors – cardiologists, dermatologists, dentists, podiatrists, rhinologists 5

6. Examples of specialization
Teachers – grade level, subject, coaches
Stores at the mall – food court, hats, electronics, shoes, clothes
Write two examples of specialization in each of these areas:
Restaurant Movie Courts 6

7. How does specialization relate to voluntary exchange?
Because we specialize, we rely on others for the things we don’t produce (CAUSE AND EFFECT!)
In an exchange, BOTH sides are looking to gain something
BOTH sides gain in VOLUNTARY, NON-FRAUDULENT EXCHANGE 7

8. How does each side gain in these potential transactions?
LAWYER 8

9. Circular Flow

10. GPS
SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.
Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.
Explain the role of money and how it facilitates exchange.

11. Components of the circular flow
Product market
Factor (resource) market
Households
Businesses
Government
Money
Goods/services
Resources

12. Taxes
Taxes
GOVERNMENT
Goods and Services

13. Supply and Demand

14. GPS
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.
Define the Law of Supply and the Law of Demand.
Describe the role of buyers and sellers in determining market clearing price.

15. Demand vs. Quantity Demanded
Description
What
changes
it?
does it
look
like?

16. Demand vs. Quantity Demanded
Description
the amount of a good or service people are willing/able to buy at ALL possible prices
It is a LINE, a series of points
Amount of a good/service people will buy at ONE price
It is a POINT!!!!

17. Demand vs. Quantity Demanded
What
changes
it?
One of 5 determinants from RIPEN
ONLY PRICE!

18. Demand vs. Quantity Demanded
What
does it
look
like?
(Increase)
Price
Price (P) P1 P2 D2 D D1 Q1 Q2
Quantity
Quantity (Q)

19. Supply vs. Quantity Supplied
Description
What
changes
it?
does it
look
like?

20. Supply vs. Quantity Supplied
Description
amount of a good or service people are willing/able to sell at ALL possible prices
It is a LINE, a series of points
Amount of a good/service people will sell at ONE price
It is a POINT!!!!

21. Supply vs. Quantity Supplied
What
changes
it?
One of 5 determinants from GRENT
ONLY PRICE!

22. Supply vs. Quantity Supplied
What
does it
look
like?
(Increase)
Price
Price (P) S1 S S2 P2 P1 Q1 Q2
Quantity
Quantity

23. Demand
amount of a good or service that consumers are willing and able to purchase at various prices
this can be represented by a graph or by a table
DIFFERENT THAN QUANTITY DEMANDED
QUANTITY DEMANDED – amount a consumer is willing and able to purchase at a SPECIFIC price

24. Demand Graph Essential components Demand line = D
At $2, there is a QUANTITY DEMANDED of 5
Essential components
Y axis = prices of good
X axis = quantity of good
AXES MATTER!
Demand line = D
Price (P)
Quantity (Q) D $2 5

25. Law of Demand
THERE IS AN INVERSE RELATIONSHIP BETWEEN PRICE and QUANTITY DEMANDED
Why?
the more expensive something becomes, the more likely people are to find a substitute
diminishing marginal utility

26. Supply
amount of a good or service that producers are willing and able to sell at various prices
this can be represented by a graph or by a table
DIFFERENT THAN QUANTITY SUPPLIED
QUANTITY SUPPLIED – amount a producer is willing and able to sell at a SPECIFIC price

27. Supply Graph Essential components Supply line = S
Y axis = prices of good
X axis = quantity of good
Supply line = S
Price (P)
Supply line = S
At a price of $2, there is a QUANTITY SUPPLIED of 3 S $2 3
Quantity (Q)

28. Law of Supply
THERE IS A DIRECT RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED
Why?
the higher the price, the more likely the chance for a greater profit to be made

29. Market for Diamond Rings
DEMAND SHIFTS (IRDL)
What happens if people’s income doubles?
Now, at $200, people want 150 rings.
What about at $100? Will people want more or less?
Assume that a diamond ring costs $200
At $200 buyers are buying around 100 a day
If the price were $100, buyers would be buying 150 a day
Market for Diamond Rings P
$200
$100 D2 D Q
100
150

30. Price
IF ALL THAT CHANGES IS PRICE, then ONLY QUANTITY DEMANDED or SUPPLIED CHANGES!!!!!!!! P P1 P2 D Q Q1 Q2

31. RIPEN and GRENT “Determinants of Supply and Demand”

32. Determinants of Demand (Things that shift the entire line!)P E N
elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other good decreases; if price of the complement decreases, demand for the other good increases
Substitutes: if price of substitute increases, demand for other good increases; if price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand decreases
references – preferences increase, demand increases; preferences decrease, demand decreases
xpectations – expect higher prices in future, current demand increases expect lower prices in future, current demand decreases
umber of buyers – # of buyers increase, demand increases; # of buyers decrease, demand decreases

33. Determinants of Supply (Entire Line)G R E N T
overnment decisions
TAXES – taxes increase, supply decreases; taxes decrease, supply increases
SUBSIDIES –subsidies increase, supply increases; subsidies decrease, supply decreases
REGULATIONS – regulations increase, supply decreases; regulations decrease, supply increases
esource prices or availability -
resource prices have an inverse relationship with supply
resource availability has a direct relationship with supply
xpectations – expect to sell more, supply increases; expect to sell less, supply decreases; expect to sell at future higher prices, immediate supply decreases.
umber of producers – direct relationship to supply
echnology or training – direct relationship to supply

34. GPS
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.
Describe the role of buyers and sellers in determining market clearing price.
Illustrate on a graph how supply and demand determine equilibrium price and quantity.
Explain how prices serve as incentives in a market economy. 34

35. GPS
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.
Define the Law of Supply and the Law of Demand.
Describe the role of buyers and sellers in determining market clearing price.
Illustrate on a graph how supply and demand determine equilibrium price and quantity.
Explain how prices serve as incentives in a market economy. 35

36. GPS
SSEMI3 The student will explain how markets, prices, and competition influence economic behavior.
Identify and illustrate on a graph factors that cause changes in market supply and demand.
Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.
Define price elasticity of demand and supply.

37. Market Structures

38. GPS
SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy.
Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.

39. Market Structures MOST COMPETITIVE LEAST COMPETITIVE
Pure Monopolistic Oligopoly Monopoly
Competition Competition

40. Competitive Markets 40

41. 2 Major Types of Competitive Markets
Pure Competition
Monopolistic Competition 41

42. PURE COMPETITION
No single buyer or seller controls supply, demand, or prices
There are 4 conditions for PC
Many Buyers and Sellers
Identical Products
Informed Buyers
Easy Market Entry and Exit 42

43. 1. Many Buyers/Sellers
Each company or producer accounts for a small portion of goods
Everyone acts INDEPENDENTLY, little or no teamwork among competitors 43

44. 2. Identical Products
Buyers choose goods almost SOLELY based on price, not quality
Consumers are highly informed about product 44

45. 3. Informed Buyers Buyers will decide if prices are acceptable
This is possible because all the products are nearly identical
Offers easy comparison between competitors 45

46. 4. Easy Market Entry
Extremely easy to enter the market and make a profit
Low start-up costs, few regulations
Easy to switch between goods if you’re already in the market 46

47. Real World PC? Pure Competition is a model
AGRICULTURE is closest to pure competition
Many farmers, food is very similar, buyers are informed
Commodities also are close
Gold, silver, dairy, etc 47

48. MONOPOLISTIC COMPETITION
Similar to pure competition in some areas
Many producers
Fairly easy to enter market
Primary difference between pure competition is sellers try to DIFFERENTIATE their products through advertising 48

49. Monopolistic Competition (cont’d)
Competition based on things other than price
Quality, size, perks, color…
Advertising differences is key 49

50. Differences other than Price

51. Differences other than Price

52. What are these companies selling?

54. Problem with Profits 1. No real control over price
MC and PC face problem of non-sustainable profits
2 major problems
1. No real control over price
If price goes too high, consumers purchase from someone else
If profits are extremely large, other firms enter the industry because it’s easy to get in
2. In MC, advertising constantly changes the playing field
Consumers change back and forth from one brand to another based on their preferences
SHORT RUN profits are possible with differentiation 54

55. Journal 21
Identify 3 different goods that are monopolistically competitive (shoes, hamburgers, etc)
For each good, identify 3 different brands
Explain what each brand has that the other two don’t have 55

56. Imperfect Competition56

57. Imperfectly Competitive Markets
- Unlike competitive markets, firms in imperfectly competitive markets may be able to set prices or production
- 2 types: Oligopoly and Monopoly 57

58. 3 Conditions for Oligopoly
1. Few LARGE sellers
- top 3-4 companies/sellers handle 75% of demand
2. Identical or VERY similar products
- producers less willing to take chances
Difficult market entry
- Large firms have already paid start-up costs 58

59. Typically try to use non-price competition
Oligopolies at Work
Typically try to use non-price competition
T.V. Stations, Cars, Movie studios 59

60. Oligopolies At Work Firms set prices based on other firms
INTERdependent pricing
Firms set prices based on other firms
Price leaders: largest seller sets a price and others follow 60

61. Collusion: when the major sellers set a price or production level
Oligopolies at Work
Collusion: when the major sellers set a price or production level
Typically the price is above equilibrium, but there are no cheaper substitutes 61

62. Usually short-lived because of greed/self-interest
Oligopolies at Work
Cartels: an open form of collusion where production levels or prices are announced
OPEC or DeBeers
Usually short-lived because of greed/self-interest 62

63. 3 Conditions for Monopolies
1. Single Seller
Total control of production and price setting
2. No reasonable substitutes
Forces demand for good, even if prices are too high
3. Difficult or Impossible Market Entry
Too high start-up costs or too technical field 63

64. Examples of Monopolies or near Monopolies
Currently under investigation.
Potentially trying to form a monopoly in the Used Video Game market.
Claiming ebay/amazon as competition
NFL – Convicted of being an illegal monopoly in 1980
Standard Oil, broken up in 1911
Had competition from Livenation, but are currently under negotiations to buy Livenation

65. Not all Monopolies are “bad”
The cost to build more rail lines would be tremendous just for someone to make a little bit of profit
Fayette county water authority is a “natural monopoly”
The costs to society of having another competitor are too great

66. Why not charge outrageous prices?
1. Consumer Demand: Increase in price of too much would cause demand of zero
2. Potential Competition: Startup costs are extremely high, but if prices got high enough, entrepreneurs would have incentive to enter
3. Government Regulation 66

67. No journal. Get out the market structures sheet from yesterday
No journal. Get out the market structures sheet from yesterday. Complete the market structure practice sheet

68. Business Organizations68

69. GPS
SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy.
Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation. 69

70. Business Organizations
3 basic business structures
Sole Proprietorship – one person owns/manages
Partnership – 2 or a small group
Corporation – a group of shareholders
Each has various costs and benefits
All types must deal with 4 general issues
Liability, life expectancy, financial options, and taxes

71. Sole Proprietorships Advantages Low start-up costs Keeps all profits
Full control
Can respond to market quickly
Easy to discontinue
Disadvantages
100% Owner liability
Legal, debt, taxes, etc
Life expectancy of company
Limited access to resources

72. Partnerships Advantages Low startup costs
Take advantage of specialization
Larger pool of capital
Disadvantages
Potential for conflict
Unlimited liability
General partnership vs. limited liability

73. Corporations Advantages Limited liability Much larger pool of capital
Take advantage of specialization
Prestige
Disadvantages
Difficulty of startup
corporate charter, stocks
Double taxation
The corporation is a SEPARATE individual from the people who run it.
Loss of control
More regulation

75. What’s On the Test Supply/Demand Specialization/Voluntary Exchange
Why do people trade?
Why do we specialize?
Circular Flow
Which direction do the arrows flow?
What are the components?
Market Structures
What are the characteristics of the 4?
How does each structure affect prices/profits?
Business Organizations
Pros/Cons of each type of Organization
Supply/Demand
How are prices set in a market?
Law of Supply/Law of Demand
RIPEN/GRENT
What happens to equilibrium price/quantity when supply/demand shift
Price Floors/Ceilings