section 1 the marketplace in a market economy, buyers and sellers set prices
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Section 1
The Marketplace
In a market economy, buyers and sellers set prices.
Section 1
The Marketplace (cont.)
• In a market economy, consumers collectively have a great deal of influence on prices of all goods and services.
• The demand of a good or service creates supply.
• A market represents the freely chosen actions between buyers and sellers.
Vocab1
demand: the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period
supply: the amount of a good or service that producers are able and willing to sell at various prices during a specified time period
Section 1
The Marketplace (cont.)
• In a market economy, individuals decide for themselves the answers to:
– What?
– How?
– For Whom?
What are these questions called? HINT, you learned it in chapter 1.
Section 1
The Marketplace (cont.)
• A market economy is based on the principle of voluntary exchange - a transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange.
Section 1
The Law of Demand
The law of demand states that as price goes up, quantity demanded goes down, and vice versa.
VS 1
The law of demand states that as price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up.
Section 1
The Law of Demand (cont.)
• Several factors explain the inverse relation between price and quantity demanded, or how much people will buy of any item at a particular price.
– Real income effect
– Substitution effect
• Factors include:
Vocab7
real income effect: economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same
substitution effect: economic rule stating that if two items satisfy the same need and the price of one rises, people will buy more of the other
Section 1
The Law of Demand (cont.)
• Diminishing marginal utility:
– Utility - the ability of any good or service to satisfy consumer wants
– Marginal utility - an additional amount of satisfaction
– Law of diminishing marginal utility - the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased
A. A
B. B
C. C
Section 1
Do you feel that the law of demand benefits you as a shopper?
A. Always
B. Sometimes
C. Never
Section 2
Graphing the Demand Curve
A demand curve is a graph that shows the relationship between the price of an item and the quantity demanded.
Section 2
Graphing the Demand Curve (cont.)
• Economist can show the relationship between a change in quantity demanded and a change in demand using a demand curve.
View: Graphing the Demand Curve
Section 2
Graphing the Demand Curve (cont.)
• A demand schedule is a table reflecting quantities demanded at different possibleprices.
• A demand curve shows the quantitydemanded of a good or service at each possible price. Demand curves slope downward, clearly showing the inverse relationship.
Section 2
Determinates of Demand
A change in the demand for a particular item shifts the entire demand curve to the left or right.
Section 2
Determinates of Demand (cont.)
• Factors that can affect demand for a specific product or service:
– Changes in population
– Changes in income
– Changes in people’s tastes and preferences
View: If Population Increases
View: If Income Decreases
View: If Preferences Change
Section 2
Determinates of Demand (cont.)
– The availability and price of substitutes
– The price of complementary goods
• The decrease in the price of one good will increase the demand for its complementary.
View: If Price of Substitute Decreases
View: If Price of Complement Decreases
A. AB. BC. CD. D
Section 2
A change in the demand of a product shifts the demand curve which way?
A. Up and down
B. Horizontally
C. Left and Right
D. Vertically
Section 2
The Price Elasticity of Demand
Elasticity of demand measures how much the quantity demanded changes when price goes up or down.
Section 2
The Price Elasticity of Demand (cont.)
• For some goods, a rise or fall in price greatly affects the amount people are willing to buy. This economic concept is referred to as elasticity.
• The measure of how much consumers respond to a given change in price is referred to as price elasticity of demand.
View: Demand vs. Quantity Demanded
View: Goods with…
Section 2
The Price Elasticity of Demand (cont.)
elastic demand: situation in which a given rise or fall in a product’s price greatly affects the amount that people are willing to buy
inelastic demand: situation in which a product’s price change has little impact on the quantity demanded by consumers
View: Demand vs. Quantity Demanded
View: Goods with…
A. A
B. B
Section 2
A vacation to Australia is an example of which type of demand?
A. Elastic
B. Inelastic
Section 3
Profits and the Law of Supply
The law of supply states that as price goes up, quantity supplied goes up, and vice versa.
Section 3
Profits and the Law of Supply (cont.)
• To understand pricing, you must look at both demand and supply.
– The higher the price of a good, the greater the incentive is for a producer to produce more.
• The law of supply states that as the price of a good rises, the quantity supplied also rises. As the price falls, the quantity supplied also falls.
View: The Law of Supply
Vocab20
quantity supplied: the amount of a good or service that a producer is willing and able to supply at a specific price
Section 3
The Supply Curve
A supply curve is a graph that shows the relationship between price and quantity supplied.
VS 2
The law of supply states that as price goes up, quantity supplied also goes up. As price goes down, quantity supplied goes down.
Section 3
The Supply Curve (cont.)
• A supply schedule is a table showing quantities supplied at different possible prices.
• The supply curve is an upward-sloping line that shows in graph form the quantities producers are willing to supply at each possible price.
A. A
B. B
Section 3
According to the supply curve, what is the relationship between price and quantity supplied?
A. Direct
B. Inverse
Section 3
The Determinants of Supply
A change in the supply of a particular item shifts the entire supply curve to the left or right.
Section 3
The Determinants of Supply (cont.)
• Many factors affect the supply of a specific product. Four of the major determinants are:
– The price of inputs
– The number of firms in the industry
– Taxes imposed or not imposed
View: If Inputs Become Cheaper
View: If Number of Firms Increases
View: If Taxes Increase
Section 3
The Determinants of Supply (cont.)
– Technology
• Any improvement in technology will increase supply.
View: If Technology Improves Production
technology: the use of science to develop new products and new methods for producing and distributing goods and services
Page 190
A. A
B. B
C. C
D. D
Section 3
Which way will the supply curve shift if there is an increase in supply?
A. Right
B. Left
C. Up
D. Down
Section 3
The Law of Diminishing Returns
When a business wants to expand, it has to consider how much expansion will really help the business.
Section 3
The Law of Diminishing Returns (cont.)
• Will product output continue to increase proportionally as more workers are hired?
• The law of diminishing returns shows that as more units of a factor of production are added to the other factors of production, after a certain point, the extra output for each additional unit hired will begin to decrease.
View: Supply vs. Quantity Supplied
View: Diminishing Returns
Section 4
Equilibrium Price
In free markets, prices are determined by the interaction of supply and demand.
Section 4
Equilibrium Price (cont.)
• Demand and supply operate together. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls (and vice versa).
• The point at which the quantity demanded and quantity supplied meet is called the equilibrium price.
View: Equilibrium Price
View: Change in Equilibrium Price
VS 3
The point at which the quantity demanded and the quantity supplied meet is called the equilibrium price.
Section 4
Prices as Signals
Under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers.
Section 4
Prices as Signals (cont.)
• Rising prices signal producers to produce more and consumers to purchase less.
• Falling prices signal producers to produce less and consumers to purchase more.
• A shortage occurs when at the current price, the quantity demanded is greater than the quantity supplied.
• Prices above the equilibrium price reflect a surplus to suppliers. (quantity supplied > quantity demanded at current price.
Section 4
Prices as Signals (cont.)
• When a market economy operates without restriction, it eliminates shortages and surpluses.
– When a shortage occurs, the price goes up to eliminate the shortage.
– When surpluses occur, the price falls to eliminate the surplus.
A. A
B. B
C. C
Section 4
If a company didn’t make enough of a certain shoe, and the demand for it was high, what would happen to the price?
A. It would increase.
B. It would decrease.
C. It would stay the same.
Section 4
Price Controls
Under certain circumstances, the government sometimes sets a limit on how high or low a price of a good or service can go.
Section 4
Price Controls (cont.)
– Effective price ceilings, and resulting shortages, often lead to non-market ways of distributing goods and services such as rationing and leading to the black market.
• A price ceiling is a government-set maximum price that may be charged for a particular good or service.
View: Price Ceilings and Price Floors
Vocab29
rationing: the distribution of goods and services based on something other than price
black market: “underground” or illegal market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold
Section 4
Price Controls (cont.)
• Conversely, a price floor, is a government-set minimum price that can be charged for goods and services.
A. A
B. B
C. C
Section 4
Do you feel that the government should be able to intervene in the market?
A. Always
B. Sometimes
C. Never
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