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 with others with different skills to produce something
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
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. Explaining the Circular Flow diagram
Imagine a family wants to have some popcorn to eat during movie night. The family would be represented by the “Households” box on the left. Rather than do everything themselves to produce the popcorn someone in the household will just go to a grocery store and buy the popcorn. The grocery store is the “Product Market,” where people pay money (“Expenditures”) to get the goods they need (“Products” like popcorn).
Where did the family get the money to pay for the popcorn? Very likely, someone worked at a job in return for a salary. In the diagram, the working family member of the household provided labor (a “Productive Resource”) at a “Factor Market” (also called a “Resource Market”) in return for “Income,” or money.

14. Explaining the Circular Flow diagram (continued)
That explains the left side of the diagram, showing how the family demanded popcorn and then acquired it. The right side of the diagram shows how the popcorn was supplied. To be a successful popcorn “Business,” a company must secure kernels of corn; these are the primary “Resource” needed to produce popcorn. In the diagram, the “Resource” can be paid for by “Wages, Interest, Net Profit.” This just illustrates that there is a variety of ways a business can pay for its resources. If the popcorn company owns its own farm, it would pay “Wages” to its employees to harvest the “Resource.” If it doesn’t own its own farm, it might pay money (“Net Profit”) to some independent farmer in order to purchase corn, its “Resource.”
Once the business has its kernels of corn, it’s time to package them and prepare them for sale in the grocery store. These bags of popcorn are the “Goods” that travel to the “Product Market.” Of course, the popcorn company doesn’t give its popcorn away; the grocery store must pay the popcorn maker money, which is shown as the “Revenue” arrow.

15. Supply and Demand

16. 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.

17. 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

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

19. 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

20. The demand curve shows the amount of goods or services that buyers are able and willing to purchase at different prices.

21. 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

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

23. 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

24. The graph shows the firm’s supply, the quantity of goods or services that someone is able and willing to supply at different prices.

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

26. Supply and Demand

27. Explaining Supply and Demand
At equilibrium, the demand exactly equals supply, which is why P is called the equilibrium price and Q is called the equilibrium quantity. If a firm produces Q* at a price of P*, they should be able to sell all that they make. This is very efficient, and efficiency is good for a business.
Equilibrium price is also called market clearing price

28. 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. 28

29. 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.

30. Market for Diamond Rings
DEMAND SHIFTS (IRDL)
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
What happens if people’s income doubles?
Market for Diamond Rings P
$200
$100 D2 D Q
100
150

31. Determinants of Demand (Things that shift the entire line. ) (
Determinants of Demand (Things that shift the entire line!) (*All statements work in reverse as well!) R I P E N
elated goods (Complements and Substitutes)
Complements – if price of complement increases, demand for the other good decreases
Substitutes – if price of substitute increases, demand for other good increases.
ncome – income increases, demand increases
references – preferences increase, demand increases
xpectations – expect higher prices in future, current … demand increases
umber of buyers – # of buyers increase, demand increases

32. Shifting Demand (RIPEN) not price

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

34. Shifting Supply (GRENT) not price

35. Price ceilings lead to shortages
This figure illustrates the shortage that occurs when a price ceiling is imposed on suppliers. Consumers demand QD while Suppliers are only willing to supply QS.

36. Price Floors lead to surpluses: Market for Wheat

37. Why does a price floor lead to a surplus?
“Price Floors in Wheat Markets” shows the market for wheat. Suppose the government sets the price of wheat at PF. Notice that PF is above the equilibrium price of PE. At PF, we read over to the demand curve to find that the quantity of wheat that buyers will be willing and able to purchase is W1 bushels. Reading over to the supply curve, we find that sellers will offer W2 bushels of wheat at the price floor of PF. Because PF is above the equilibrium price, there is a surplus of wheat equal to (W2 − W1) bushels. The surplus persists because the government does not allow the price to fall.

38. Define Price elasticity
economists occasionally talk about price elasticity. Elasticity refers to the percentage change in quantity divided by the percentage change in price, and it can refer to both supply and demand. The main idea is to track how much a change in price affects a change in quantity, and vice versa.

39. Illustration of inelastic demand

40. Explanation for case 1
In Case 1, price increases greatly, from P1 to P2. However, consumers still desire the good provided, so while quantity demanded is diminished, it is only a small drop from Q1 to Q2. As the change in price is greater than the change in quantity demanded, the demand curve for this good is said to be inelastic.

41. Illustration of elastic demand

42. Explanation for case 2
A small change in price in Case 2 leads to a great decrease in the quantity demanded. Since this good is very sensitive to changes in price, this good has a demand curve that is elastic.

43. Elasticity in supply curves work under the same principle as elasticity in demand curves. In Case 1, a larger change in price leads to a smaller change in quantity, so the supply curve in Case 1 is inelastic. In Case 2, a smaller change in price leads to a greater change in quantity, showing that the supply curve in Case 2 is price elastic.

44. Market Structures

45. 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.

46. Competitive Markets 46

47. 2 Major Types of Competitive Markets
Pure Competition
Monopolistic Competition 47

48. 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 48

49. 1. Many Buyers/Sellers
Each company or producer accounts for a small portion of goods
Everyone acts INDEPENDENTLY, little or no teamwork among competitors 49

50. 2. Identical Products
Buyers choose goods almost SOLELY based on price, not quality
Consumers are highly informed about product 50

51. 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 51

52. 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 52

53. 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 53

54. 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 54

55. Monopolistic Competition (cont’d)
Competition based on things other than price
Quality, size, perks, color…
Advertising differences is key 55

56. Differences other than Price

57. Differences other than Price

58. What are these companies selling?

60. 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 60

61. Journal #?
Identify 3 different categories of goods (shoes, hamburgers, etc)
For each category of good, identify 3 different brands
Explain what each brand has that the other two don’t have 61

62. Imperfect Competition62

63. Imperfectly Competitive Markets
- Unlike competitive markets, firms in imperfectly competitive markets may be able to set prices or production
- 2 types: Oligopoly and Monopoly 63

64. 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 64

65. Typically try to use non-price competition
Oligopolies at Work
Typically try to use non-price competition
T.V. Stations, Cars, Movie studios 65

66. 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 66

67. 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 67

68. 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 68

69. 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 69

70. 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

71. 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

72. 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 72

73. Business Organizations73

74. 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. 74

75. 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

76. 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

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

78. 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

80. 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

81. Sample Questions for Unit 3
A corporation MOST often seeks to increase its profit and expand the size of its operations by
A issuing stock
B joining an oligopoly
C becoming a monopoly
D controlling the money supply

82. Answer to sample question
Answer: A Standard: Types of businesses and market structures
Choices B and C are types of market structures and have no relationship to strategies that a corporation can use to increase its profit or size of operation. A corporation cannot control the money supply, choice D. The Federal Reserve controls the money supply. Choice A is the correct answer.

83. Organizers of many high-interest sporting events such as the Super Bowl and the World Series usually set ticket prices lower than the equilibrium price, citing fairness to the public as their reason. What names do economists give to the resulting set price and disequilibrium situation?
A price ceiling; surplus
B price ceiling; shortage
C price floor; shortage
D price floor; surplus

84. Answer to sample question
Answer: B Standard: Markets and prices
Setting ticket prices below the equilibrium price creates a price ceiling. This eliminates choices C and D. Price ceilings create a shortage of a good, so choice B is the correct answer.

85. In the graph below, lines D and S1 show the demand and supply schedules for the Anaxos Fruit Shake company in its last month of operation.

86. Price Quantity A Rises Rises B Drops Rises C Rises Drops D Drops Drops
Anaxos just upgraded its capital equipment by buying a machine that makes fruit shakes faster and cheaper than the original machine. What effect should this have on the graph?
Price Quantity
A Rises Rises
B Drops Rises
C Rises Drops
D Drops Drops

87. Answer to sample question
1. Answer: B Standard: The laws of supply and demand
The new machine makes shakes faster and cheaper. This allows the supplier to reduce the price, which eliminates choices A and C. Since the price is lower, the number produced can increase to meet the demand (on the same curve). This eliminates choice D. Therefore the correct answer is choice B.

88. Use the graph to answer the question.

89. When the income in households increases, what is the likely result?
A The supply curve will shift to the left.
B The supply curve will become vertical.
C The demand curve will shift to the left.
D The demand curve will shift to the right.

90. Answer to sample question
Answer: D Standard: Markets and prices Houses can be considered normal goods, since people tend to increase their consumption of housing (by buying a bigger house) as their income increases. In the short term, this increased demand will lead the demand curve to move to the right, so the answer is choice D.