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MicroeconomicsEconomics

Key Terms

• Circular flow• Resource market• Product market• Law of Demand• Law of Supply• Quantity Demanded• Quantity Supplied• Equilibrium• Determinants of Demand• Determinants of Supply

• Price Ceiling• Price Floor• Perfect Competition• Monopolistic

Competition• Oligopoly• Monopoly• Sole Proprietorship• Partnership• Corporation

LESSON 1: CIRCULAR FLOW

Standards

SSEMI1 Describe how households and businesses are interdependent and interact through flows of goods, services, resources, and money.

a. Illustrate a circular flow diagram that includes the product market, the resource (factor) market, households, and firms.

b. Explain the real flow of goods, services, resources, and money between and among households and firms.

Key Questions

• What are the two main sectors of the economy?

• What do households need businesses for?

• What do businesses need households for?

• What does the Circular Flow Model (CFM) demonstrate?

• What is the resource, or factor, market?

• What is the product market?

Households and Firms

The free market economy is powered by the “household” and the “firm”…

Household—a person or group of persons living in the same residence. These are the CONSUMERS.

Firm—an organization that uses resources to produce a product, which it sells. Firms are the PRODUCERS.

The Factor Market

• Firms purchase factors of production from households…

• Land, Labor & Human Capital.

• This is the factor market—

• The place where firms purchase land, labor, human capital and physical capital.

The Product Market

The goods and services that firms produce…

Are sold in the Product Market…

And purchased by households…

With the money they received from firms in the factor market.

Product

Markets

Goods and

Services

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

Factories

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Product

Markets

Goods and

Services

Factor Markets

Land Labor

Capital

Entrepreneurs

Business

and

FactoriesIndividuals

and

Households

Circular Flow of Economic Activity

Circular Flow of Economic Activity

LESSON 2: SUPPLY AND DEMAND

Standards

SSEMI2 Explain how the law of demand, the law of supply, and prices work to determine production and distribution in a market economy.

a. Define the law of supply and the law of demand.

b. Distinguish between supply and quantity supplied, and demand and quantity demanded.

Connection to Circular Flow Model

1. Do individuals supply or demand?

2. Do business supply or demand?

3. Who demands in the product market?

4. Who supplies in the product market?

26

Key Questions

• What is the difference between a change in demand versus a change in quantity demanded?

• What is the difference between a change in supply versus a change in quantity supplied?

• Where do you find the market clearing price?

• How do buyers impact prices?

DEMAND DEFINED

28

What is Demand?

Demand is the different quantities of goods

that consumers are willing and able to buy at

different prices.(Ex: Bill Gates is able to purchase a Ferrari, but if

he isn’t willing he has NO demand for one)

What is the Law of Demand?

There is an INVERSE relationship between

price and quantity demanded

LAW OF DEMANDAs Price Falls…

…Quantity Demanded Rises

As Price Rises…

…Quantity Demanded Falls

29

PriceQuantity

Demanded

Example of DemandI am willing to sell several A’s in Honors

Economics. How much will you pay?

30

Price Quantity

DemandedDemand

Schedule

Why does the Law of Demand occur?

The law of demand is the result of three

separate behavior patterns that overlap:

1.The Substitution effect

2.The Income effect

3.The Law of Diminishing Marginal Utility

We will define and explain each…

31

Why does the Law of Demand occur?

If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)

If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.

32

1. The Substitution Effect

2. The Income Effect

Why does the Law of Demand occur?

• Utility = Satisfaction• We buy goods because we get utility from them• The law of diminishing marginal utility states that as

you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease

• In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit.

Discussion Questions:

1. What does this have to do with the Law of Demand?

2. How does this effect the pricing of businesses?

33

3. Law of Diminishing Marginal Utility

U-TIL-IT- Y

Change

N/A

$54

$33

$15

$10

$5

Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

Graphing Demand

35

The Demand Curve• A demand curve is a graphical representation of a

demand schedule.

• The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)

• When reading a demand curve, assume all outside

factors, such as income, are held constant.

Let’s draw a new demand curve for cereal…

36

GRAPHING DEMAND

37

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

Draw this large

in your notes

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

GRAPHING DEMAND

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

38

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

LESSON 3: CHANGE IN QUANTITY DEMANDED

Standards

SSEMI3 Describe how households and businesses are interdependent and interact through flows of goods, services, resources, and money.

b. Identify the determinants (shifters) of demand (e.g., changes in related goods, income, consumer expectations, preferences/tastes, and number of consumers) and illustrate the effects on a supply and demand graph.

Key Questions

• List the non-price determinants (shifters) of demand and define each one.

• Provide an example of a complementary good.

• How does the substitution effect impact demand?

• What impact do changes in consumer income have on demand?

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

42

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

What if cereal

makes you smarter?

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

43

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

44

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

45

PriceQuantity

Demanded

$5 10 30

$4 20 40

$3 30 50

$2 50 70

$1 80 100

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

46

PriceQuantity

Demanded

$5 10 30

$4 20 40

$3 30 50

$2 50 70

$1 80 100

Demand

D1

Increase in Demand

Prices didn’t change but

people want MORE

cereal

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

47

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

What if cereal

causes baldness?

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

48

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

49

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

50

PriceQuantity

Demanded

$5 10 0

$4 20 5

$3 30 20

$2 50 30

$1 80 60

Demand

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

51

PriceQuantity

Demanded

$5 10 0

$4 20 5

$3 30 20

$2 50 30

$1 80 60

DemandD2

Decrease in Demand

Prices didn’t change but

people want LESS cereal

Change in Demand

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Demand

Schedule

10 20 30 40 50 60 70 80

52

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

What if the price

of MILK goes up?

Demand

What Causes a Shift in Demand?

5 Shifters (Determinates) of Demand:

1.Tastes and Preferences

2.Number of Consumers

3.Price of Related Goods

4.Income

5.Future Expectations

Changes in PRICE don’t shift the curve. It

only causes movement along the curve.53

Prices of Related Goods

2. Complements are two goods that are bought

and used together. – If the price of one increase, the demand for the

other will fall. (or vice versa)

– Ex: If price of skis falls, demand for ski boots will...

1. Substitutes are goods used in place of one

another. – If the price of one increases, the demand for the

other will increase (or vice versa)

– Ex: If price of Pepsi falls, demand for coke will…

The demand curve for one good can be affected by a

change in the price of ANOTHER related good.

54

Substitutes

55

Substitutes

56

Substitutes

57

Substitutes

58

Substitutes

59

Substitutes

60

Substitutes

61

Complements

62

Income

2. Inferior Goods – As income increases, demand falls– As income falls, demand increases– Ex: Top Ramen, used cars, used clothes,

1. Normal Goods – As income increases, demand increases– As income falls, demand falls– Ex: Luxury cars, Sea Food, jewelry, homes

The incomes of consumer change the demand, but

how depends on the type of good.

63

Inferior Goods

64

P

Q Cerealo

$3

$2

D1

Price of Cereal

Quantity of Cereal

10 20

Change in Qd vs. Change in Demand

A C

B

There are two ways to increase quantity from 10 to 20

D2

1. A to B is a change

in quantity

demand (due to a

change in price)

2. A to C is a change

in demand (shift

in the curve)

PracticeFirst, identify the determinant (shifter) then

decide if demand will increase or decrease

66

ShifterIncrease or

DecreaseLeft or Right

1

2

3

4

5

6

7

8

Practice

Hamburgers (a normal good)1. Population boom 2. Incomes fall due to recession3. Price for Carne Asada burritos falls to $1 4. Price increases to $5 for hamburgers5. New health craze- “No ground beef”6. Hamburger restaurants announce that they

will significantly increase prices NEXT month 7. Government heavily taxes shake and fries

causes their prices to quadruple.8. Restaurants lower price of burgers to $.50

First identify the determinant (Shifter). Then

decide if demand will increase or decrease

67

LESSON 4: SUPPLY AND DEMAND

Standards

SSEMI3 Describe how households and businesses are interdependent and interact through flows of goods, services, resources, and money.

a. Identify the determinants (shifters) of supply (e.g., changes in costs of productive resources, government regulations, number of sellers, producer expectations, technology, and education) and illustrate the effects on a supply and demand graph.

Key Questions

• List the non-price determinants (shifters) of supply and define each one.

• What impact does input costs have on supply of a good/service?

• What impact does government regulation and taxes have on supply of a good/service?

• How do technology investments increase supply?

Supply DefinedWhat is supply?

Supply is the different quantities of a good that sellers

are willing and able to sell (produce) at different prices.

What is the Law of Supply?

There is a DIRECT (or positive) relationship between

price and quantity supplied.

•As price increases, the quantity producers make

increases

•As price falls, the quantity producers make falls.

Why? Because, at higher prices profit seeking

firms have an incentive to produce more.

EXAMPLE: Mowing Lawns71

Example of SupplyYou own an lawn mower and you are

willing to mow lawns. How many lawns will you mow at these prices?

Price per

lawn mowed

Quantity

SuppliedSupply

Schedule

72

$1

$5

$20

$50

$100

$1000

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

Draw this large

in your notes

73

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

74

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

75

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

What if new

companies start making

cereal?

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

76

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

77

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

78

PriceQuantity

Supplied

$5 50 70

$4 40 60

$3 30 50

$2 20 40

$1 10 30

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

79

SupplyS2

PriceQuantity

Supplied

$5 50 70

$4 40 60

$3 30 50

$2 20 40

$1 10 30

Increase in SupplyPrices didn’t change but

there is MORE cereal produced

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

80

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

What if a drought

destroys corn and wheat

crops?

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

81

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

82

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

83

PriceQuantity

Supplied

$5 50 30

$4 40 20

$3 30 10

$2 20 1

$1 10 0

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

84

Supply

S2

PriceQuantity

Supplied

$5 50 30

$4 40 20

$3 30 10

$2 20 1

$1 10 0

Decrease in SupplyPrices didn’t change but

there is LESS cereal produced

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply

Schedule

10 20 30 40 50 60 70 80

85

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

What if cereal companies

find a quicker way to make

cereal?

6 Shifters (Determinants) of Supply

1. Cost of resources

2. Number of Sellers

3. Technology

4. Government regulation: Taxes &

SubsidiesSubsidies

A subsidy is a government payment that supports a business or market.Subsidies cause the supply of a good to increase.

TaxesThe government can reduce the

supply of some goods by placing anexcise tax on them. An excise taxis a tax on the production or sale of

a good.

RegulationRegulation occurs when the

government steps into a market toaffect the price, quantity, or quality of

a good. Regulation usually raisescosts.

5. Education

6. Producer expectationChanges in PRICE don’t shift the curve. It only

causes movement along the curve. 86

Supply PracticeFirst, identify the determinant (shifter) then

decide if supply will increase or decrease

87

ShifterIncrease or

DecreaseLeft or Right

1

2

3

4

5

6

Supply Practice

Hamburgers1. Mad cow disease kills 20% of cows 2. Price of hamburgers increase 30%3. Government taxes burger producers4. Restaurants owners train their

employees in better methods of hamburger flipping.

5. New bun baking technology cuts production time in half

6. Minimum wage increases to $20

1. Which determinant (SHIFTER)?

2. Increase or decrease?

3. Which direction will curve shift?

88

LESSON 5: EQUILIBRIUM

Standards

SSEMI2 Explain how the law of demand, the law of supply, and prices work to determine production and distribution in a market economy.

c. Describe the role of buyers and sellers in determining market clearing price (i.e.equilibrium).

d. Illustrate on a graph how supply and demand determine equilibrium price and quantity.

Review1. Explain the Law of Demand

2. Explain the Law of Supply

3. Identify the 5 shifters of demand

4. Identify the 6 shifters of supply

5. Identify 10 stores in the mall

91

Putting Supply and

Demand Together!!!

92

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

93

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

D

SSupply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

Supply and Demand are put together to determine

equilibrium price and equilibrium quantity

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

94

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

Supply and Demand are put together to determine

equilibrium price and equilibrium quantity

Equilibrium Price = $3 (Qd=Qs)

Equilibrium Quantity is 30

D

S

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

95

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

Supply and Demand are put together to determine

equilibrium price and equilibrium quantity

D

S

What if the price

increases to $4?

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

96

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

At $4, there is disequilibrium. The quantity

demanded is less than quantity supplied.

Surplus(Qd<Qs)

How much is the surplus at $4?

Answer: 20

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

97

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

How much is the surplus if the price is $5?

Answer: 40What if the price

decreases to $2?

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

98

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

At $2, there is disequilibrium. The quantity

demanded is greater than quantity supplied.

Shortage(Qd>Qs)

How much is the shortage at $2?

Answer: 30

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

99

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

Answer: 70

How much is the shortage if the price is $1?

Qo

$5

4

3

2

1

PDemand

Schedule

10 20 30 40 50 60 70 80

100

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

SWhen there is a

surplus, producers lower prices

The FREE MARKET system automatically pushes the price toward equilibrium.

When there is a shortage, producers

raise prices

Shifting Supply and

Demand

101

Assume shifts in supply or demand change

equilibrium P and Q instantaneously

102

Supply and Demand AnalysisEasy as 1, 2, 3

1. Before the change:• Draw supply and demand

• Label original equilibrium price and quantity

2. The change:• Did it affect supply or demand first?

• Which determinant caused the shift?

• Draw increase or decrease

3. After change:• Label new equilibrium?

• What happens to Price? (increase or decrease)

• What happens to Quantity? (increase or decrease)

Let’s Practice!103

S&D Analysis Practice

Analyze Hamburgers1. Price of sushi (a substitute) increases2. New grilling technology cuts production

time in half3. Price of burgers falls from $3 to $1. 4. Price for ground beef triples5. Human fingers found in multiple burger

restaurants.

1. Before Change (Draw equilibrium)

2. The Change (S or D, Identify Shifter)

3. After Change (Price and Quantity After)

104

Pearl Exchange

Activity

105

Voluntary Exchange Activity

106

LESSON 6: PRICE FLOORS AND CEILINGS

Standards

SSEMI3 Describe how households and businesses are interdependent and interact through flows of goods, services, resources, and money.

c. Explain and illustrate on a graph how prices set too high (e.g., price floors) create surpluses, and prices set too low (e.g., price ceilings) create shortages.

Key Questions

• What is a government price floor?

• What is a government price ceiling?

• What is the result of a price floor?

• What is the result of a price ceiling?

Government

Involvement#1-Price Controls: Floors and Ceilings

#2-Subsidies

#3-Taxes

110

#1-PRICE CONTROLSWho likes the idea of having a price ceiling on

gas so prices will never go over $1 per gallon?

111

Price Ceiling= ShortageDisequilibrium

• Pc- Central Authority sets a Price Ceiling below the Equilibrium Price (Pe).

• Quantity Supplied (Qs) is less than Quantity Demanded (Qd) causing a shortage.

• To Calculate a Shortage: Quantity Supplied minus Quantity Demanded

Qo

$5

4

3

2

1

P

10 20 30 40 50 60 70 80 113

D

S

Shortage(Qd>Qs)

Maximum legal price a seller can charge for a product.Goal: Make affordable by keeping price from reaching Eq.

Gasoline

Does this

policy help

consumers?

Result:

BLACK

MARKETSPrice

Ceiling

Price Ceiling

To have an effect,

a price ceiling must be

below equilibrium

Price Floor= SurplusDisequilibrium

• Pf- Central Authority sets a Price Floor above the Equilibrium Price (Pe).

• Quantity Supplied (Qs) is greater than Quantity Demanded (Qd) causing a surplus.

• To Calculate a Surplus: Quantity Supplied minus Quantity Demanded

Qo

$

4

3

2

1

P

10 20 30 40 50 60 70 80 115

D

SSurplus(Qd<Qs)

Minimum legal price a seller can sell a product.

Goal: Keep price high by keeping price from falling to Eq.

Corn

Does this

policy help

corn

producers?

Price Floor

Price Floor

To have an effect,

a price floor must be

above equilibrium

Practice Questions1. Which of the following will occur if a legal price floor is

placed on a good below its free market equilibrium?

A. Surpluses will develop

B. Shortages will develop

C. Underground markets will develop

D. The equilibrium price will remain the same

E. The quantity sold will increase

A. A price ceiling causes a shortage if the ceiling price is

above the equilibrium price

B. A price floor causes a surplus if the price floor is below

the equilibrium price

C. Price ceilings and price floors result in a misallocation of

resources

D. Price floors above equilibrium cause a shortage

2. Which of the following statements about price control is true?

116

LESSON 7: BUSINESS TYPES AND MARKET STRUCTURES

StandardsSSEMI3 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 with regards to number of owners, liability, lifespan, decision making, and taxation.

b. Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure (perfect) competition with regards to number of sellers, barriers to entry, price control, and product differentiation.

Key Questions

• What are the four market structures in a mixed-market economy?

• Who has the most control over the price of their product, and why?

• What is an example of an oligopoly?

• What is an example of monopolistic competition?

• What are the three types of business?

Business Organizations

Business Organizations

• Pride of

Ownership

• Unlimited Liability

• Lower Taxes

• Limited Life

• Quicker Decision

Making

• One Owner: Retains All

Profit

• Easiest and Least

Expensive to Start

• Difficult to Raise Money

• More

Management

Expertise-

Specialization

• Decision

Making

Requires

Consensus

• Multiple

Owners: Shares

Profit

• Greater Access

to Financial

Capital

Market Structures

Monopoly Oligopoly Perfect

Competition

Monopolistic

Competition

Least

Competitive

Most

Competitive

Utilities-

Water &

Electricity

Examples:

Automobiles

Telecommunications

Breakfast Cereals

Airlines

Restaurants

Hotels

Hair Salons

Agriculture

Market Stru

ctures

Market Stru

ctures