microeconomics standard 2: students analyze the elements of america’s market economy in a global...

MicroeconomicsStandard 2: Students analyze the elements of America’s

market economy in a global setting and its impact on their community, state, country or host nation.

Supply and DemandObjective: Understand the relationship of the concept of

incentives to the law of supply, and the relationship of the concept of incentives and substitutes to the law of demand.

What is Demand? (Consumers)

Demand is the combination of desire, ability and willingness to buy a product.

Demand involves the price and quantity of a specific product at a given point in time.

A demand schedule is a table that lists how much of a product consumers will buy at all possible prices.

A demand curve is a graph that shows the quantities demanded at all possible prices.

A market demand curve is a graph that shows how much of a product all consumers will buy at all possible prices.

There is an inverse relationship between the price of an item and the quantity demanded.

The Law of Demand states that consumers will buy more of a product at lower prices and less at higher prices.

http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/epp/EPP_p94.swf




Factors Effecting Demand

Law of Diminishing Marginal Utility Marginal Utility is the additional

satisfaction or usefulness a consumer gets from having one more of a product.

Diminishing marginal utility is the decrease in satisfaction or usefulness from having one more of the same product.

Change in the Quantity Demanded Change in the quantity demanded is

movement along the supply curve showing the amount someone is willing to purchase changes when the price changes.

Income effect is the change in quantity demanded that occurs because of a change in a buyer’s real income when a price changes.

Substitution effect is the change in quantity demanded that occurs because of a change in the relative price of a product in comparison to other products.

Change in Demand Change in demand is a total

shift in the demand curve when people buy different amounts at every price.

Factors that contribute to change in demand include consumer income, consumer tastes, substitutes, complements, expectations and number of consumers.

Substitutes are competing products that can be used in place of one another.

Complements are products that increase the use of other products.





Elasticity of Demand Elasticity is a measure of responsiveness that

shows how one variable responds to change in another variable.

Elasticity shows cause and effect relationships in economics. It shows how a dependent variable, such as quantity demanded, responds to a change in an independent variable, such as price.

Demand elasticity is a measure that shows how a change in quantity demanded responds to a change in price.

When a change in price causes a relatively large change in quantity demanded, it is said to be elastic.

When a change in price causes a relatively small change in quantity demanded, it is said to be inelastic.

When a change in price causes a proportional change in quantity demanded, it is said to be unit elastic.

Elasticity = Change in Quantity / Change in Price

http://www.glencoe.com/video_library/index_with_mods.php?PROGRAM=9780078747649&VIDEO=4759&CHAPTER=4&MODE=2

Total Expenditures = Price X Quantity By observing the change in total expenditures

when the price changes, we can test for elasticity.

If the demand is elastic, there is an inverse relationship between price and quantity—when price goes down, total expenditures will go up. Price and expenditures move in opposite directions; more will be bought at a lower price, therefore profits will increase if prices fall. Slope > 1

If the demand is inelastic, total expenditures will decline as price declines. Price and expenditures move in the same direction. The same amount will be bought regardless of price, therefore profits will decrease if price falls. Slope < 1.

If the demand is unit elastic, the total expenditures remain unchanged when prices decrease. Perfect proportions between price and quantity never happens in real life! Slope = 1.

Determining Demand Elasticity Can the purchase be delayed? Are adequate substitutes available? Does the purchase use a large portion of income?




What is Supply? (Producers) Supply is the amount of a product offered

for sale at all possible prices. The Law of Supply states that producers

will offer more for sale at a higher price than a lower price.

A supply schedule is a table that shows how much a producer will supply at all possible prices.

A supply curve is a graph that shows the different amounts of a product that is supplied over a range of prices.

A market supply curve is a graph that shows the various amounts offered by all firms over a range of possible prices.

Quantity supplied is the amount offered for sale at a given price.

Change in quantity supplied is the change in the amount offered for sale when the price changes.

Change in supply is a situation where different amounts are offered for sale at all possible prices in the market, in other words, a shift in the supply curve.

Factors that contribute to a change in supply include cost of resources, productivity, technology, taxes and subsidies, expectations, government regulations and the number of sellers.

Subsidies are government payments to encourage or protect a certain economic activity.

Supply elasticity is a measure of how the quantity supplied responds to a change in price.

The Theory of Production http://www.glencoe.com/video_libra

ry/index_with_mods.php?PROGRAM=9780078747649&VIDEO=4760&CHAPTER=5&MODE=2



The production function is a graph that shows how a change in the amount of a single variable input (such as labor) changes total output.

In the short run production period, there is only time to change variable inputs, such as labor.

In the long run production period, there is time to change the quantities of all productive resources, including capital. In the long run, companies can change the amount of machinery, technology or land use to increase production.

The total product is the total output or production for a firm.

The marginal product is the extra output due to the addition of one more unit of input.











Stages of Production STAGE 1: Increasing marginal

returns occurs when the marginal product of each additional worker increases. They are able to efficiency work together and share equipment to meet demand.

STAGE 2: Diminishing marginal returns occurs when the marginal product of each additional worker increases, but at smaller and smaller amounts.

STAGE 3: Negative marginal returns occurs when the marginal product of each additional worker decreases. They compete for equipment and get in each others way! Production actually goes down!

Cost, Revenue and Profit Maximization

Measures of Cost Fixed costs (overhead) remain the

same, regardless of the level of production or services offered. Fixed costs include rent, taxes, pay for executives and wear and tear on equipment.

Variable costs change when the levels of production change. Variable costs include labor, raw materials and other costs such as electricity or shipping cost.

Total costs are the sum of the fixed costs and the variable costs.

Marginal costs are the extra costs associated with producing one additional unit. Like production, marginal costs can be shown in stages.

The break-even point occurs when the total costs equal the total revenue. Businesses use marginal analysis to help them get beyond the break-even point so that they can make profits.

Marginal Analysis Total Revenue is the total amount earned

by a firm from the sale of its products. Marginal Revenue is the extra revenue

from the sale of one additional unit of output.

Marginal analysis is the decision making process that compares the extra costs of doing something to the extra benefit gained.

Profit Maximization When marginal cost is less than marginal

revenue, more variable inputs should be hired to expand outputs.

Profit Maximizing quantity of output is the level of production where marginal costs are equal to marginal output. Businesses aim to find this magic level!

Pricing and Decision Making

Objective: Analyze how prices reflect the relative scarcity of goods and services and perform an allocative function in a market economy.

Objective: Trace the effects of changes in supply and/or demand on the relative scarcity, price, and quantity of particular products.

Objective: Analyze how domestic and international competition in a market economy affects goods and services produced and the quality, quantity, and price of those products.

The Allocative Function of Prices(allocate: to apportion for a specific purpose or to particular persons or things)

Prices as Signals Price is the monetary value of a product

based as established by supply and demand.

Prices help determine what, how and for whom to produce.

High prices signal buyers to buy less and producers to produce more. Low prices signal buyers to buy more and producers to produce less.

Prices represent a compromise between buyers and sellers. Prices are neutral—they do not favor one over the other.

Prices are flexible. When unforeseen events occur, buyers and sellers adjust their consumption and production to absorb unexpected shocks.

Prices are understood by all. There are no ambiguity to prices; therefore, people can make decisions quickly and efficiently.

Prices are free of administrative costs. In a competitive market, prices will find equilibrium without outside interference.

Do YOU believe in prices? How else could we determine who

gets what? Would YOU like to live in a place

where there are no prices? What kind of economy would it be if

there were no prices? Rationing is another system of

allocating goods and services. In a rationing system, a government or other agency decides everyone’s fair share and distributes ration coupons—permits that allow the holder to receive a given amount of a rationed product.

Rationing is never popular! Everyone always feel that their share is not big enough, and rationing involves high administration costs. Rationing can also have a negative impact on the incentive to produce.

Are prices the best way to allocate resources between markets?

X Marks the Spot: Market Equilibrium and Pricing

Transactions in a market economy are voluntary! Buyers and sellers compromise to reach an agreement on price.

This compromise can be shown using an economic model—a simplified version of a complex behavior expressed in the form of a equation, graph or illustration.

For any given market, economists can show a supply curve and a demand curve on the same graph.

The place where they intersect is the equilibrium price—the price where quantity supplied equals quantity demanded.

Surplus is a situation where quantity supplied is greater than quantity demanded at a given price. Prices should go down!

Shortage is a situation where quantity supplied is less than quantity demanded at a given price. Prices should go up!

Surpluses and shortages help to establish the equilibrium price and keep the market from becoming stagnant!

Explaining and Predicting Prices A change in quantity supplied is movement

along the supply curve; a change in supply is a shift in the curve.

A change in supply will result in a new equilibrium price.

A change in quantity demanded is movement along the supply curve; a change in demand is a shift in the curve.

A change in demand will result in a new equilibrium price.

It is also possible to have a change in supply and a change in demand at the same time. This makes the equilibrium price difficult for economists to predict because there are so many variables in the world.

Economists consider elasticity when making predictions. If the curves are inelastic, there will be a greater change in prices. If the curves are elastic, there will be less of a change in prices.

In a competitive market, the prices will always reach equilibrium if the market is left alone!

http://www.npr.org/2011/12/31/143312592/peanut-prices-make-a-go-to-snack-more-expensive

http://www.npr.org/2012/01/05/144526652/solar-panels-compete-with-cheap-natural-gas

http://www.npr.org/2012/01/21/145511786/farmers-arm-themselves-against-pecan-thieves
















Social Goals and Market Efficiency

Objective: Identify the effect of price controls on buyers and sellers and the political motives for imposing controls. Examples: price floors-minimum wages and price ceilings-agricultural subsidies

Government Interventions on Market Pricing

Distorting Market Outcomes A price ceiling is the highest legal

price that can be charged for a product. Rent control is an example of a

price ceiling. Price ceilings can lead to shortages.

A price floor is the lowest legal price

that can be paid for a product. Minimum wage is an example of a

price floor.http://www.npr.org/2012/01/03/144594861/raising-the-minimum-wage-who-does-it-help

Price floors can lead to surpluses.

Agriculture Price Supports During the Great Depression, farmers suffered

astronomical losses. This was because both demand and supply of food are inelastic.

The government established the Commodity Credit Corporation to stabilize farm prices by setting a target price—a price floor for agriculture products set by the government to stabilize farm income.

Farmers were granted nonrecourse loans—agriculture loans that carry no penalty or further obligation if it is not repaid. This meant that farmers could choose to either sell the crops in the market and use the proceeds to repay the CCC loan or keep the proceeds of the loan and let the CCC take possession of the crop.

The program helped the farmers, but it created huge surpluses of food that the government needed to use. To put the food back on the market, the government started making deficiency payments—cash payments making up the difference between the market price and the target price.

Because new technology increased output and there were too many farmers involved in agriculture, The Conservation Reserve Program paid farmers not to farm. Land was set aside in “land banks” to be used in the future.

This program was replaced with the Federal Agriculture Improvement and Reform Act, which was later replaced with the Farm Security and Rural Investment Act. Each time the government stepped in, the price supports were increased!

When Markets Talk Although markets are impersonal, they do react to public

opinion!

http://www.npr.org/2012/01/03/144594861/raising-the-minimum-wage-who-does-it-help

http://www.npr.org/2012/01/03/144594861/raising-the-minimum-wage-who-does-it-help

Objective: Explain the roles of property rights, competition, and profit in a market economy.

Property Rights, Competition and Prices

Objective: Examine the process by which competition among buyers and sellers determines a market price.

Objective: Analyze how domestic and international competition in a market economy affects goods and services produced and the quality, quantity, and price of those products.

Small Businesses A sole proprietorship is a business

owned and operated by a single person who has the rights to all the profits and unlimited liability for all debt occurred by the firm.

Advantages Easy to start up Easy to manage No need for profit sharing No business taxes No bosses! Easy to get out of the business

Disadvantages Unlimited liability Difficult to raise financial capital Limited size/inventory/efficiency Lack of experience in management Difficulty attracting employees Limited life of company

Unlimited liability is the requirement that an owner is personally and fully responsible for all losses and debts of the business.

Inventory is the stock of finished goods and stock held in reserve.

Limited Life is a condition where a firm ceases to exist when an owner dies, quits or sells a business.

A partnership is an unincorporated business owned and operated by two or more people who share the profits and debts.

A general partnership is when all partners are equally responsible for management and debt.

A limited partnership is when one or more of the partners are not active in the daily management of the business and have limited responsibility for debts.

Corporations A corporation is a kind of business

organization recognized by law as a separate legal entity.

Corporations may buy and sell property, to enter into legal contracts and to sue and be sued.

Corporations need charters, or written government approval, to be established. Stocks are sold to shareholders who are paid dividends.

Common stock is a form of corporate ownership where each shareholder gets one vote for each unit of stock they own.

Preferred stock is a form of corporate ownership without the rights to vote; however, shareholders get their investments back before common shareholders.

Advantages Disadvantages

Business Growth and Expansion

Growth through reinvestment

Growth through mergers

Nonprofits

Perfect Competition and Profit Maximization

Laissez faire is the philosophy that government should not interfere with business activities. Those who subscribe to this philosophy are against government regulation and intervention.

Perfect competition is the ideal—it is rarely if ever found in the real world. There are five necessary conditions for perfect competition. There must be a large number of

buyers and sellers so that no single buyer or seller can affect the price.

Sellers offer identical products—one sellers merchandise is just as good as another’s.

Buyers and sellers act independently—sellers compete against each other for profits, and consumers compete against each other for the best price.

Buyers and sellers are both reasonably informed about the product and prices.

Buyers and sellers are free to enter into, conduct or get out of business.

Look at the supply and demand curve for the market and find the equilibrium price.

To find out how an individual firm can maximize profits, assume that the equilibrium price, demand and marginal revenue are all the same.

Look at the marginal costs for this particular firm. Profits are maximized when marginal revenue equals marginal costs.

The graph shows the firm how much to produce at the market equilibrium price.





Market Structures Market structure is the nature and degree

of competition among firms in the same industry.

Perfect competition is a market structure with many well informed and independent buyers and sellers who exchange identical products.

Imperfect competition is a market structure that does not meet all of the conditions of perfect competition.

Monopolistic competition is a market structure that meets all of the conditions of perfect competition except identical products.

Product differentiation is the real or imagined difference between competing products in the same industry.

Nonprice competition are sales strategies that focus on a product’s appearance, quality, or design rather than its price.

An oligopoly is a market structure in which a few large sellers dominate the industry.

Collusion is an agreement, usually illegal, among producers to fix prices, limit output, or divide markets.

Price fixing is an agreement, usually illegal, by firms to charge the same price for a product.

A Monopoly is a market structure with a single seller of a particular product. A natural monopoly is a market structure

where average costs of production are lowest when a single firm exists.

A geographical monopoly is a market structure in which one firm has a monopoly in a geographic area.

A technological monopoly is a market structure based on a firm’s ownership or control of a production method, process or other scientific advance.

A governmental monopoly is a monopoly owned and operated by the government.

Economies of scale is a situation in which the average cost of production falls as a firm gets larger.

Market Failures Inadequate Competition

When firms get larger and fewer, there is decreased competition.

Less competition usually means less efficient use of resources.

On the supply side, there is no competition in a monopoly.

On the demand side, there is no competition if the government is the only buyer.

Inadequate Information The market functions best when buyers

and sellers make informed decisions. Resource Immobility

This occurs because land, labor, capital and entrepreneurs are not fluid and tend to stay put in one location, even if they are not being employed.

Public Goods Public goods are goods and services

whose benefits are available to everyone and are paid collectively. In general, people would choose not to pay for these if possible, so they run the risk of failure in most markets.

Externalities Externalities are economic side

effects that impact an uninvolved third party.

A negative externality is the harm, cost or inconvenience suffered by a third party.

A positive externality is a benefit someone receives even though they were not involved in the activity that generated the benefit.

Governments sometimes step in to correct both negative and positive externalities.

The Role of Government How does the government maintain

competition? Prohibits market structures that are not

competitive Regulates markets when full

competition is not possible Anti-trust Regulation A trust is an illegal combination of

corporations or companies organized to hinder competition.

Price discrimination is the practice of selling the same product at different prices to different consumers.

Sherman Anti-trust Act Clayton Anti-trust Act Federal Trade Commission Act Robinson Patman Act A Cease and Desist Order is a ruling

ordering a company to stop an unfair business practice that limits competition.

Government Regulation How does the government improve

economic efficiency? Efficient and competitive markets have

transparency! Information should be readily available so that an informed choice can be made.

Public disclosure is the requirement that a business reveal information about its products or its operations for the public.

Governments also provide public goods.

As a result of government intervention, we now have a modified free enterprise system—a market economy with various degrees of government regulations.

Objective: Evaluate the role of profit as the incentive to entrepreneurs in a market economy.

Objective: Analyze the economic principles that guide the location of agricultural production and industry and the spatial distribution of transportation and retail facilities.

Objective: Describe the functions of the financial markets.

microeconomics standard 2: students analyze the elements of america’s market economy in a global...

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