Download - Economics Unit 2 How the Market Works!
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Economics Unit 2How the Market Works!
Chapter 4: DemandChapter 5: SupplyChapter 6: Prices
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Understanding Demand
Demand– the desire to own
something and the ability to pay for it
Law of Demand– consumers buy more of
a good when its price decreases and less when its price increases.
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Effects on Demand
Substitution effect – when consumers react to
an increase in a goods price by consuming less of that good and more of other goods
hybrid cars Income Effect
– the change in consumption resulting from a change in real income
lottery winner
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Demand Curve
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What Can Change Your Demand?
Change in Income– Normal Good- a good
that consumers demand more of when incomes increase
More steak, less hamburger
– Inferior Good- a good that consumers demand less of when their incomes increase
Less Ramen Noodles, more progressive soup
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What will shift the demand curve?
Income Consumer expectations Consumer tastes and advertising Price of related goods
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What will shift the demand curve?
1. Income What % of your income will you spend on something?
2. Consumer expectations Will the price rise today, or tomorrow? Will the price fall today, or tomorrow?
3. Consumer tastes and advertising What is popular today?
4. Price of related goods What is the price of gas? What is the price of cable for your television?
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What Can Change Your Demand?
Price of Related Goods– Complements-two
goods are bought and used together Ski’s Boots Poles Bindings
– Substitutes-goods used in place of one another Ski’s and snowboards
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Supply
Supply– the amount of available
goods
law of supply– tendency of suppliers to
offer more of a good at a higher price
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Cost of Production
Marginal Product of labor– Marginal Product of Labor (5.6) is the change in
output from hiring one more worker (increases, decreases).
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Marginal Product of Labor
Labor (# of workers) Marginal Product Output
1 4 42 10 63 17 74 23 65 28 56 31 37 32 18 31 -1
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Cost of Production
Increasing Marginal Return– is the level of production in which the marginal
product of labor increases as the number of workers increase.
Diminishing Marginal Return– is the level of production in which the marginal
production of labor decreases as the number of workers increases. Capital MUST EQUAL Labor
Negative Marginal Returns – reverses the productivity of the operation (workers in each
others way).
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Cost of Production
Fixed Cost – a cost that does not
change, no matter how much of a good is produced
Rent Machinery repairs Property taxes Salaried workers
– Manager Desks Chairs
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Cost of Production
Variable Cost – a cost that rises and
falls depending on how much is produced
Electricity Heat bills Capital to produce the
goods Office supplies
– Paper– Pens and pencils
Hourly workers
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Cost of Production
Total Cost – fixed cost plus variable cost– The amount of money required to run the firm
Marginal Cost – the cost of producing one more unit of a good (5.9)
– With beanbags – lower with specialties of the 1st and 3rd, then increases
– More workers --- fixed production Facility
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Setting Output
How many employees to hire? – Remember, goal is to maximize profits!
Highest profit? Total Revenue /vs/ Total Costs
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Setting Output
Marginal Revenue and Marginal Cost– Marginal Revenue
is an additional income from selling one more unit of a good; sometimes equal to the price.
***The ideal level of output is when marginal revenue equals marginal cost.
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The Shut Down Decision
When do you shut down an operation facility?– variable costs – costs when the facility is up and
running.– fixed costs – owner pays whether the factory is
open or closed. Stay open if the benefit of operating (total
revenue) is greater than the variable costs!!!– Total Revenue > Variable Costs
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Chapter 6 Prices
Section 1 Objective: – to identify the nature of prices in regards to
supply/demand Section 2 Objective:
– to identify how change in the market affects equilibrium
Section 3 Objective:– to identify the role of prices.
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Combining Supply and Demand
Balancing the Market
Buyers and Sellers= Equilibrium
(market clearing)
Demand and Supply
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Defining Equilibrium
Equilibrium -the point at which quantity demanded and quantity supplied are equal.
– At equilibrium, the market for a good is stable
Disequilibrium – occurs when the quantity supplied is not equal to quantity demanded.
– every price that is not at equilibrium is at disequilibrium!
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Disequilibrium
Excess Demand – is when the quantity demanded is more than the quantity supplied.
1. low prices encourage excess demand
2. as long as there is excess demand, suppliers will keep raising the price until the market cannot handle it.
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Disequilibrium
Excess Supply – is when the quantity supplied is more than the quantity demanded.– sellers do not like to
waste their resources on excess supply, especially when the excess cannot be stored.
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Changes in Market Equilibrium
Changes in Price– market wants equilibrium price and quantity
Excess demand leads to higher prices. Higher prices lead to rising supply and quantity
demanded to fall. Excess supply will cause price cuts and quantity
demand to rise
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Changes in Market Equilibrium
Shifts in the supply curve – advances in technology– new government taxes/subsidies– changes in the prices of raw materials and labor– a shift in the supply curve will create a new
equilibrium
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Changes in Market Equilibrium
Understanding a shift in supply – Early 1980s – CD player cost $1000 – In 1987 – CD player cost $300– Today – CD player costs ???
Machines today have more feature and are better than the machines of the early 1980s
Also, the price to produce and manufacture has gone down, so this passes on the savings to us. – Demand is also not as high, either.
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Changes in Market Equilibrium
Finding a New Equilibrium – Surplus – situation in which quantity supplied is
greater than quantity demanded; also, known as excess supply Excess supply will lead to decreased prices, which will
lead to an increase in demand.
Changing Equilibrium– Equilibrium changes as the market conditions
change (demand/supply). Sales, Rebates, Price Changes
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Changes in Market Equilibrium
Problem of Excess Demand– Ipod’s or PS3’s
Shortage – situation in which quantity demanded is greater
than quantity supplied. Search Costs
– the financial and opportunity costs consumers pay when searching for a good or service.
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The Role of Prices
Prices in the Free Market – gives the consumer choices (bartering)
The Advantages of Prices – Price as an incentive can cause consumers to buy more,
which can cause producers to make more.
Prices as Signals– At low prices, people buy………at high prices, people tend
not to buy.– Low prices tend to slow production, whereas high prices
increase production
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The Role of Prices
Flexibility 1. Prices are more flexible than output levels.
(Short/Long Run)2. Supply Shock – is a sudden shortage of a good
(excess demand).3. Rationing – is dividing up goods or services
using criteria other than price. *this can be expensive and time consuming
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The Role of Prices
Price System is “Free”– The market can control prices without the use of
government Rationing and Shortages
– Former Soviet Union /vs/ The United States– Communism /vs/ Wartime
Black Market – is a market in which goods are sold illegally– Ex: Stealing TV's and Selling them
Importing Illegal OR Prescribed Drugs and selling them