Unit 2: Elements of a Market Economy

Chapter 4: DemandChapter 5: SupplyChapter 6: Price

Chapter 7: Competition

Chapter 4: Demand

Lesson 1: Defining Demand

Lesson 2: Changes in Demand

Lesson 3: Demand Elasticity

Lesson 1: Defining Demand• First, market, is the exchange between

buyers and sellers of goods/services• The Law of Demand

– The higher the price the less people will buy

• Graphing the Law of Demand– Let’s turn to page 50… – Substitution effect… is there a sub?– Law of diminishing marginal utility

• When you start losing your desire for a product/service after your initial purchase

Lesson 2: Changes in Demand

• Analyzing Market Demand– See page 54, Figure 4.2

• Causes of Shifts in Demand– Price– Income– Population– Complements (items used together)– Substitutes– Personal preferences– Special influences

• Umbrellas• Fads

– Expectations

Lesson 3: Demand Elasticity

• Price Elasticity of Demand – how sensitive consumers are to price changes

• Elastic and Inelastic Demand– Elastic

• Change in price seriously changes demand

– Inelastic• Change in price doesn’t seriously change

demand

• Effects of Elasticity– Example: Vegetables

• In season – relatively low priced• Can be purchased in various forms if price rises

– Inelastic items• Insulin• Laundry detergent

– What effects elasticity?• Time• Percentage of income spent on an item• Competition

Chapter 5: Supply

Lesson 1: Defining Supply

Lesson 2: Production and Supply

Lesson 3: Changes in Supply

Lesson 1: Defining Supply

• The Law of Supply– The higher the price the more suppliers will offer

for sale; if price falls so will quantity supplied– Profit motive– Supply schedule (pg. 64)– Supply curve

• Analyzing Market Supply– Market supply is the total of all of the individual

companies within a market

Lesson 2: Production and Supply

• The Law of Variable Proportions– output or supply will change as one resource

varies, even if the others do not– Production schedule (page 68)– Marginal product – extra output or change by

adding one unit of a factor of production

• Stages of Production– Supply increases – Total product increase but by smaller amounts– Negative returns

Lesson 3: Changes in Supply

• Why Supply Rises and Falls– Productivity– Government

• Taxes• Regulations

– Opinions– Competition

• Supply Elasticity– Measured by how quickly the quantity supplied

changes as a result of a price change – Production capabilities

Chapter 6: Price

Lesson 1: Why Price Matters

Lesson 2: Supply, Demand & Price

Lesson 3: Controlling Prices

Lesson 1: Why Price Matters• Market Signals

– Rise in prices says to producers to make more– Rise in prices says to consumers buy less– Fall in prices says to producers make less– Fall in prices says to consumers buy more– Shortage: demand is greater than supply– Rationing = limiting demand– Surplus: supply is greater than demand– Equilibrium price: quantity demanded is equal to

quantity supplied

• Market Forces

Lesson 2: Supply, Demand, & Price

• Establishing a Price– Equilibrium amount– Turn to page 84

• Explaining Shifts in Equilibrium Price

Lesson 3: Controlling Prices• Price Ceilings

– Maximum price government sets for a product/service• Rent control

• Rationing– Black market

• Price Floors– Lowest price government sets for a product/service

• Minimum wage• Price support – a government action to increase the price of a

product. Government usually purchases the product.

• Communication in the Market– taxes

Chapter 7: Competition

Lesson 1: Market Structures & Perfect Competition

Lesson 2: Imperfect Competition

Lesson 3: No Competition

Lesson 1: Market Structures & Perfect Competition

• Market Structure – Amount of competition that exists in an industry

• Perfect Competition– A market structure in which thousands of independent firms

produce identical products for consumers– Thousands of buyers & sellers– Identical products– No price controls– Complete information– Easy entry & exit – Limited controls by government

Lesson 2: Imperfect Competition• Monopolistic Competition

– Monopoly• Many sellers and buyers• Differentiated products

– Toothpaste• Limited control over price• Good access to information• Relatively easy entry & exit• Small role of government

– Oligopoly• Few firms• Differentiated or identical products

– Cars, cereal, fast-foot• Greater influences on price• Limited information• Difficulty in entry or exit

– patents• Larger role of government

Lesson 3: No Competition• Characteristics of a Monopoly

– One firm– Unique product

• Electricity

– Control over price– Complete information– Extreme difficulty of entry/exit– Significant role of government

• Antitrust laws• Merger• Horizontal merger• Vertical merger• Conglomerate

• Types of Monopoly– Natural

• Water, gas, electric companies

– Government• Post office

– Technological• Drug industry

– Geographic • Small town with one grocery store