Explain the relationship between price and quantity shown on the graph. Why do you think people react this way to price?

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1 Explain the relationship between price and quantity shown on the graph. Why do you think people react this way to price? Price Quantity Sold

2 Unit 2: How Markets Work Chapter 4: Demand

3 The Economy: It s All About Supply and Demand When a market economy is doing well, there is lots of buying and selling. During a bad economy, buying and selling slows down. The cycle of ups and downs depends mainly on two things: supply, the amount of something that is available, and demand, the number of consumers who want it and are willing to pay for it. Supply and demand are called market forces because they act to make the market function well or poorly.

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8 Unit 2: How Markets Work Chapter 4: Demand

9 oceteris paribus is a Latin phrase economists use meaning all other things held constant. A Change in Quantity Demanded oa demand curve is accurate only as long as the ceteris paribus assumption is true. owhen the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.

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11 What Causes a Shift in Demand? Several factors can lead to a change in demand. The Following are The Determinants of Demand Income Tastes Prices of related goods and services Consumer s expectations Population

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16 Population Changes in the season, demographics or size of the population also affects the demand for most products. A thin, tiny island off the southeast tip of Texas, South Padre Island is a popular spring break destination among students who attend schools in the south. It is home to Coca Cola Beach. Attended by tens of thousands of co-eds, this massive party features all-day concerts, contests and games.

17 Demand Graphing Practice Directions: In each of the following questions, an event has occurred that will affect the demand or quantity demanded for a good. Identify the event (Determinant of Demand), then illustrate the change using a demand graph.

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19 Unit 2: How Markets Work Chapter 4: Demand

20 What Is Elasticity of Demand? Elasticity of demand is a measure of how consumers react to a change in price. Demand for a good that consumers will continue to buy despite a price increase is inelastic. Demand for a good that is very sensitive to changes in price is elastic. Chapter 4, Section 3

21 Factors Affecting Elasticity Several different factors can affect the elasticity of demand for a certain good. 1. Availability of Substitutes If there are few substitutes for a good, then demand will not likely decrease as price increases. The opposite is also usually true. 3. Necessities versus Luxuries Whether a person considers a good to be a necessity or a luxury has a great impact on the good s elasticity of demand for that person. 2. Relative Importance Another factor determining elasticity of demand is how much of your budget you spend on the good. 4. Change over Time Demand sometimes becomes more elastic over time because people can eventually find substitutes.

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23 Calculating Elasticity

24 Elastic Demand

25 Inelastic Demand

26 Elasticity and Revenue The elasticity of demand determines how a change in prices will affect a firm s total revenue or income. A company s total revenue is the total amount of money the company receives from selling its goods or services. Firms need to be aware of the elasticity of demand for the good or service they are providing. If a good has an elastic demand, raising prices may actually decrease the firm s total revenue.

27 Unit 2: How Markets Work Chapter 5: Supply

28 Using the data in the supply schedule for part time workers, draw the supply curve. Summarize the relationship between price and quantity

29 $ $ $ $ $ $7 480 $5 240 $3 0 $2 0 $1 0 Hourly rate Supply Schedule for Workers # hours seniors are willing to work

30 How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. The promise of increased revenues when prices are high encourages firms to produce more. Rising prices draw new firms into a market and add to the quantity supplied of a good.

31 What has happened to the supply of specialty coffee in the United State since 1971? What has caused this change in supply?

32 Supply Schedules & Supply Curves

33 Elasticity of Supply Elasticity of supply is a measure of the way quantity supplied reacts to a change in price. An elastic supply is very sensitive to changes in price. If supply is not very responsive to changes in price, it is considered inelastic.

34 What Affects Elasticity of Supply? Chapter 5, Section 1

35 Unit 2: How Markets Work Chapter 5: Supply

36 Explain the decline of Rubbermaid from 1994 to What factors most contributed to this decline?

37 Government Influences on Supply By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry. Subsidies A government payment that supports a business or market. Subsidies cause the supply of a good to increase. Taxes The government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good. Regulation Occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs. Import Quota: A limit on the amount of a good that can be imported.

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39 Supply Graphing Practice Directions: In each of the following questions, an event has occurred that will affect the supply or quantity supplied for a good. Identify the event (Determinant of Supply), then illustrate the change using a supply graph.

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41 Unit 2: How Markets Work Chapter 6: Prices

42 Supply and Demand Out of Balance To keep everyone producing, making profits, and buying things, supply and demand must be balanced. Here s what can happen if there is high demand but low supply: Imagine there is a big freeze in Florida and orange trees are damaged. Fewer oranges are available. If there is still a big demand for oranges, the price will go up. Fewer oranges also means there aren t as many oranges to process. Some people who pick oranges and get them ready to sell might lose their jobs. 1 Problem with this situation is On the other hand, too much supply with low demand can also hurt. Imagine a coal producer is very busy over the summer and mines tons and tons of coal. Winter comes, but it doesn t get very cold. People don t use their furnaces as much as usual, so they don t need as much coal. All of that coal sits around unused and they certainly don t need to mine any more coal. The price of coal will drop, and some people involved in producing coal could lose their jobs because there is already too much. 1 Problem with this situation is

43 The point at which quantity demanded and quantity supplied come together is known as equilibrium.

44 Market Disequilibrium If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium: Occurs when quantity demanded is more than quantity supplied. Calculate the shortage shown in the graph above.

45 Occurs when quantity supplied exceeds quantity demanded Interactions between buyers and sellers will always push the market back towards equilibrium. Calculate the surplus shown in the graph above.

46 Unit 2: How Markets Work Chapter 6: Prices

47 A Change in Supply Since markets tend toward equilibrium, a change in supply will set market forces in motion that lead the market to a new equilibrium price and quantity sold. The exact opposite will occur when supply is decreased. As supply decreases, producers will raise prices and demand will decrease. Chapter 6, Section 2

48 A Change in Demand When demand rises or falls, suppliers respond by changing prices, and a new market equilibrium is found.

49 Graphing Equilibrium Practice Using the four graphs above, identify the correct graph and how each scenario will change the equilibrium point in the market for Jelly Beans. 1. The price of sugar increases. Graph: Market Price: Increase or Decrease Market Quantity: Increase or Decrease 2. The price of bubble gum, a close substitute for jelly beans, increases. Graph: Market Price: Increase or Decrease Market Quantity: Increase or Decrease 3. A machine is invented that makes jelly beans at a lower cost. Graph: Market Price: Increase or Decrease Market Quantity: Increase or Decrease 4. The government places a tax on foreign jelly beans, which have a large share of the market. Graph: Market Price: Increase or Decrease Market Quantity: Increase or Decrease 5. The price of soda, a complementary good to jelly beans, increases. Graph: Market Price: Increase or Decrease Market Quantity: Increase or Decrease 6. Widespread prosperity allows people to buy more jelly beans. Graph: Market Price: Increase or Decrease Market Quantity: Increase or Decrease

50 Change in the Market: Supply or Demand Market Price: Increase or Decrease Market Quantity: Increase or Decrease Change in the Market: Supply or Demand Market Price: Increase or Decrease Market Quantity: Increase or Decrease

51 Change in the Market: Supply or Demand Market Price: Increase or Decrease Market Quantity: Increase or Decrease Change in the Market: Supply or Demand Market Price: Increase or Decrease Market Quantity: Increase or Decrease

52 In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors. A price ceiling is a maximum price that can be legally charged for a good. A price floor is a minimum price, set by the government, that must be paid for a good or service.

53 An is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

54 One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor. $15.00 $8.05

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56 Unit 2: How Markets Work Chapter 6: Prices Rationing Black Market

57 Efficient Resource Allocation Resource Allocation A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly. Signals Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less. Price System is "Free Unlike central planning, a distribution system based on prices costs nothing to administer. List three advantages of a price based system

58 Flexibility In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.

59 Prices as an Incentive Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production or consumption. Give two examples.

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62 Black Market

63 Activity scenario Imagine that your house had been bombed and you have nothing left, only the clothes you are wearing. You will now need to buy new clothes to last for a year.

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