ECON REFRESHER!

Today’s LEQ: How do markets operate?

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.

Law of Demand: As price increases (decreases), quantity demanded decreases (increases).

P Q PQ

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.

Law of Supply: as price increases (decreases) quantity supplied increases (decreases)

P Q P Q

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.

IRDL the Turtle

“IRDL” will help you!

INCREASE = RIGHT

DECREASE = LEFT

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.

Homework: Econ Practice

Due at the start of our next class!!!

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.