Markets
The market is the most important economic institution in a market economy
Markets exist when buyers and sellers interact
This interaction determines prices & therefore allocates scarce goods and services
Market Incentives
Prices send signals and provide incentives to buyers and sellers Think: What would
happen if the price of the average flat screen TV jumped to $30,000?
When supply or demand changes, market prices adjust, affecting incentives Think: What happens to
gas prices around peak vacation times?
Graphing Supply
Law of Supply: When price
increases (decreases), the quantity supplied increases (decreases)
Market: Doughnuts
Graphing Demand
Law of Demand: When price
increases (decreases), quantity demanded decreases (increases)
Market: Doughnuts
Equilibrium Price (Market Clearing Price)
The market settles at this price and quantity QS = QD
Why? At this point of intersection, buyers and sellers agree on both price and quantity
Market: Doughnuts
Graphing Surplus
If price is above the equilibrium price, sellers would want to sell more than buyers would want to buy QS > QD
Graphing Shortage
If price is below the equilibrium price, buyers would want to buy more than sellers would want to sell QD > QS
Are You Picking Up What I’m Putting Down?!
Answer in your notes & be ready to share:
Imagine the equilibrium price for a can of tuna is $2.00. Bumblebee Tuna sets their price at $3.00 a can. Will this result in a shortage or surplus of tuna? How do you know?
Be sure to graphically represent your answer.
Are You Picking Up What I’m Putting Down?!
Answer in your notes & be ready to share:
Imagine the equilibrium price for a can of tuna is $5.00. Bumblebee Tuna sets their price at $3.00 a can. Will this result in a shortage or surplus of tuna? How do you know?
Be sure to graphically represent your answer.
Price Controls
Not all markets are ones in which price is allowed to move freely – government may set some price controls
Prices set by a law differ from the equilibrium price
This creates inefficiencies in the market as a shortage or surplus will always occur
Why are price controls inefficient?
PRICE CEILING (MAX. PRICE) A shortage will
always result QS < QD Price is set <
Equilibrium Inefficiencies:
Consumer demand is not being met since price serves as a disincentive to producers
PRICE FLOOR (MIN. PRICE) A surplus will
always result QS > QD Price is set >
Equilibrium Inefficiencies:
Suppliers are wasting resources by producing too much
Why does this happen?
Rules establishing price don’t change the basic rule that people act in their own best self-interest
However, new rules (price controls) may alter available options
Consumers may make different choices than what they would have in the absence of rules
Think, Ink, Share
In your notes, justify why equilibrium is the most efficient place to be and be ready to share.
First, Let’s Review Demand…
Demand = the total amount consumers are willing and able to buy at all prices.
Demand Curve = the graphical representation of what consumers are willing and able to buy.
Next, Let’s Review Supply…
Supply = the total amount of a good or service producers are able to make at all prices
Supply curve = the graphical representation of a good or service producers are able to make at all prices.
Shifts in Supply and Demand
Some factors cause supply and demand to shift; represented by the movement of the entire curve
Changes in QS or QD are represented by movement along the corresponding curve
Factors Causing Demand to Change & ShiftTastes and fadsIncomeNumber of buyersFuture price
expectationsPrice and availability
of: Substitutes (i.e. Coke and Pepsi)
Compliments (i.e. peanut butter and jelly)
Activity 3: Think, Pair, Coach Person A – complete side A
Explain your answer to Person B Person B will say “Yes, that’s correct! Great
job!”… Or, they will explain what you did wrong
Person B – Complete side B Explain your answer to Person A Person A will say “Yes, that’s correct! Great
job!”… Or, they will explain what you did wrong
Alternate until all questions have been completed.
Factors Causing Supply to Change & Shift
Price of land, labor or capital (factors of production)
TechnologyNumber of other sellersPrice of other goods I could
produceTax policy
Activity 4: Think, Pair, Coach Person A – complete side A
Explain your answer to Person B Person B will say “Yes, that’s correct! Great
job!”… Or, they will explain what you did wrong
Person B – Complete side B Explain your answer to Person A Person A will say “Yes, that’s correct! Great
job!”… Or, they will explain what you did wrong
Alternate until all questions have been completed.
Guided Practice: Graphing Shifts in Supply & Demand
Scenario 1: The cast of the Jersey Shore passes away in a tragic airplane crash. What happens to the market for tanning oil?
Guided Practice: Graphing Shifts in Supply & Demand
Scenario 2: The assembly line was developed and cars were manufactured much more efficiently than in the past.
Justin Bieber…
Failed his economic assignment (probably because he was in jail). Help him understand what he did wrong.
Create Your Own Scenario…
In small groups, come up with a scenario that would cause either supply or demand to shift.
On poster paper, write down the scenario and draw the basic structure of the supply and demand graph making sure to label all of the following: Price, Quantity, Supply, Demand, Equlibrium
On a separate sheet of paper create an answer key that accurately shows the shift in supply or demand.
Exit Ticket: Best Test Question
Create a multiple choice test item for the state assessment that assesses the skills covered during our economics refresher today and yesterday. Create a problem with four answer choices, one that is correct and three that are incorrect. Make sure that the incorrect responses incorporate errors frequently made by students.