Unit 3 Markets: not just for fleas and stocks!. Specialization and Voluntary Exchange.

Unit 3 Markets: not just for

fleas and stocks!

Specialization and Voluntary Exchange

Specialization Specialization: people/companies learn and

practice a small set of skills then work or trade with others with different skills to produce something Improves efficiency/productivity The assembly line idea

Why does specialization work?

Skills are developed at a deeper level people become “experts” in their field

Costs are cut because time needed to produce is decreased

Training can be more focused and in-depth

Remember: People, Stores & industries specialize

Examples of specialization

Doctors – cardiologists, dermatologists, dentists, podiatrists, rhinologists

Examples of specialization

Teachers – grade level, subject, coaches

Stores at the mall – food court, hats, electronics, shoes, clothes

Write two examples of specialization in each of these areas: Restaurant Movie Courts

How does specialization relate to voluntary exchange?

Because we specialize, we rely on others for the things we don’t produce (CAUSE AND EFFECT!)

In an exchange, BOTH sides are looking to gain something

BOTH sides gain in VOLUNTARY, NON-FRAUDULENT EXCHANGE

How does each side gain in these potential transactions?

LAWYER

Circular Flow

GPS

SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.

Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

Explain the role of money and how it facilitates exchange.

Components of the circular flow

Product market Factor (resource) market Households Businesses Government Money Goods/services Resources

GOVERNMENT

Taxes Taxes

Goods and Services

Supply and Demand

GPS

SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy.

Define the Law of Supply and the Law of Demand.

Describe the role of buyers and sellers in determining market clearing price.

Demand vs. Quantity Demanded

Demand Quantity Demanded

Description

Whatchanges it?

What does it look like?



Description the amount of a good or service people are willing/able to buy at ALL possible pricesIt is a LINE, a series of points

Amount of a good/service people will buy at ONE priceIt is a POINT!!!!



Whatchanges it?

One of 5 determinants from RIPEN

ONLY PRICE!



What does it look like?(Increase)

Price (P)

Quantity

D

Price

Quantity (Q)

D1

P1

Q1

P2

Q2

D2

Supply vs. Quantity Supplied

Supply Quantity Supplied

Description

Whatchanges it?

What does it look like?



Description amount of a good or service people are willing/able to sell at ALL possible pricesIt is a LINE, a series of points

Amount of a good/service people will sell at ONE priceIt is a POINT!!!!



Whatchanges it?

One of 5 determinants from GRENT

ONLY PRICE!



What does it look like?(Increase)

Price (P)

Quantity

S

Price

Quantity

S1 P2

Q1

P1

Q2

S2

Demand

amount of a good or service that consumers are willing and able to purchase at various prices

this can be represented by a graph or by a table

DIFFERENT THAN QUANTITY DEMANDED QUANTITY DEMANDED – amount a consumer is

willing and able to purchase at a SPECIFIC price

Demand Graph

Essential components Y axis = prices of good X axis = quantity of good

AXES MATTER! Demand line = D

Price (P)

Quantity (Q)

D

Demand line = D At $2, there is a

QUANTITY DEMANDED of 5

$2

5

Law of Demand THERE IS AN INVERSE RELATIONSHIP

BETWEEN PRICE and QUANTITY DEMANDED

Why? the more expensive something becomes, the more

likely people are to find a substitute diminishing marginal utility

Supply amount of a good or service that producers

are willing and able to sell at various prices this can be represented by a graph or by a table

DIFFERENT THAN QUANTITY SUPPLIED QUANTITY SUPPLIED – amount a producer is

willing and able to sell at a SPECIFIC price

Supply Graph

Essential components Y axis = prices of good X axis = quantity of good Supply line = S

Price (P)

Quantity (Q)

S Supply line = S At a price of $2, there is a

QUANTITY SUPPLIED of 3

$2

3

Law of Supply THERE IS A DIRECT RELATIONSHIP

BETWEEN PRICE AND QUANTITY SUPPLIED

Why? the higher the price, the more likely the chance for

a greater profit to be made

DEMAND SHIFTS (IRDL)

P

QD

$200

150

Market for Diamond Rings

Assume that a diamond ring costs $200

At $200 buyers are buying around 100 a day

If the price were $100, buyers would be buying 150 a day

100

$100

What happens if people’s income doubles?

Now, at $200, people want 150 rings.

What about at $100? Will people want more or less?

D2

PriceIF ALL THAT CHANGES IS PRICE,

then ONLY QUANTITY DEMANDED or SUPPLIED CHANGES!!!!!!!!

Q2

P

QD

P1

Q1

P2

RIPEN and GRENT“Determinants of Supply and Demand”

Determinants of Demand (Things that shift the entire line!)

R

IPEN

elated goods (Complements and Substitutes)Complements: if price of complement increases, demand for the other good decreases; if price of the complement decreases, demand for the other good increasesSubstitutes: if price of substitute increases, demand for other good increases; if price of substitute decreases, demand for other good decreases

ncome – income increases, demand increases; income decreases, demand decreases

references – preferences increase, demand increases; preferences decrease, demand decreases

xpectations – expect higher prices in future, current demand increases expect lower prices in future, current demand decreases

umber of buyers – # of buyers increase, demand increases; # of buyers decrease, demand decreases

Determinants of Supply (Entire Line)

G

R

E

N

T

overnment decisionsTAXES – taxes increase, supply decreases; taxes decrease, supply increasesSUBSIDIES –subsidies increase, supply increases; subsidies decrease, supply decreasesREGULATIONS – regulations increase, supply decreases; regulations decrease, supply increases

esource prices or availability - •resource prices have an inverse relationship with supply•resource availability has a direct relationship with supply

echnology or training – direct relationship to supply

xpectations – expect to sell more, supply increases; expect to sell less, supply decreases; expect to sell at future higher prices, immediate supply decreases.

umber of producers – direct relationship to supply

GPS


Describe the role of buyers and sellers in determining market clearing price.

Illustrate on a graph how supply and demand determine equilibrium price and quantity.

Explain how prices serve as incentives in a market economy.

GPS


Define the Law of Supply and the Law of Demand. Describe the role of buyers and sellers in

determining market clearing price. Illustrate on a graph how supply and demand

determine equilibrium price and quantity. Explain how prices serve as incentives in a market

economy.

GPS

SSEMI3 The student will explain how markets, prices, and competition influence economic behavior.

Identify and illustrate on a graph factors that cause changes in market supply and demand.

Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.

Define price elasticity of demand and supply.

Market Structures

GPS

SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy.

Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.

Market Structures

MOST COMPETITIVE LEAST COMPETITIVEPure Monopolistic Oligopoly Monopoly

Competition Competition

Competitive MarketsCompetitive Markets

2 Major Types of Competitive 2 Major Types of Competitive MarketsMarkets

Pure CompetitionPure Competition

Monopolistic CompetitionMonopolistic Competition

PURE COMPETITIONPURE COMPETITION

No single buyer or seller controls supply, No single buyer or seller controls supply, demand, or pricesdemand, or prices

There are 4 conditions for PCThere are 4 conditions for PC Many Buyers and SellersMany Buyers and Sellers Identical ProductsIdentical Products Informed BuyersInformed Buyers Easy Market Entry and ExitEasy Market Entry and Exit

1. Many Buyers/Sellers1. Many Buyers/Sellers

Each company or producer accounts for a Each company or producer accounts for a small portion of goodssmall portion of goods

Everyone acts INDEPENDENTLY, little or no Everyone acts INDEPENDENTLY, little or no teamwork among competitorsteamwork among competitors

2. Identical Products2. Identical Products

Buyers choose goods almost SOLELY Buyers choose goods almost SOLELY based on price, not qualitybased on price, not quality

Consumers are highly informed about Consumers are highly informed about productproduct

3. Informed Buyers3. Informed Buyers

Buyers will decide if prices are acceptableBuyers will decide if prices are acceptable This is possible because all the products are This is possible because all the products are

nearly identicalnearly identical Offers easy comparison between competitorsOffers easy comparison between competitors

4. Easy Market Entry4. Easy Market Entry

Extremely easy to enter the market and Extremely easy to enter the market and make a profitmake a profit Low start-up costs, few regulationsLow start-up costs, few regulations

Easy to switch between goods if you’re Easy to switch between goods if you’re already in the marketalready in the market

Real World PC?Real World PC?

Pure Competition is a Pure Competition is a modelmodel AGRICULTURE is closest to pure AGRICULTURE is closest to pure

competitioncompetition Many farmers, food is very similar, buyers Many farmers, food is very similar, buyers

are informedare informed Commodities also are close Commodities also are close

Gold, silver, dairy, etcGold, silver, dairy, etc

MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION

Similar to pure competition in some areasSimilar to pure competition in some areas Many producersMany producers Fairly easy to enter market Fairly easy to enter market

Primary difference between pure competition Primary difference between pure competition is sellers try to DIFFERENTIATE their is sellers try to DIFFERENTIATE their products through advertisingproducts through advertising

Monopolistic Competition Monopolistic Competition (cont’d)(cont’d)

Competition based on things other than priceCompetition based on things other than price Quality, size, perks, color…Quality, size, perks, color… Advertising differences is keyAdvertising differences is key

Differences other than Price

What are these companies selling?

Problem with ProfitsProblem with Profits MC and PC face problem of non-sustainable profitsMC and PC face problem of non-sustainable profits

2 major problems2 major problems 1. No real control over price1. No real control over price

If price goes too high, consumers purchase from If price goes too high, consumers purchase from someone elsesomeone else

If profits are extremely large, other firms enter the If profits are extremely large, other firms enter the industry because it’s easy to get inindustry because it’s easy to get in

2. In MC, advertising constantly changes the 2. In MC, advertising constantly changes the playing fieldplaying field Consumers change back and forth from one brand to Consumers change back and forth from one brand to

another based on their preferencesanother based on their preferences SHORT RUN profits are possible with differentiationSHORT RUN profits are possible with differentiation

Journal 21Journal 21

Identify 3 different goods that are Identify 3 different goods that are monopolistically competitive (shoes, monopolistically competitive (shoes, hamburgers, etc)hamburgers, etc) For each good, identify 3 different For each good, identify 3 different brandsbrands Explain what each brand has that the other Explain what each brand has that the other

two don’t havetwo don’t have

Imperfect Competition

Imperfectly Competitive Markets

- Unlike competitive markets, firms in imperfectly competitive markets may be able to set prices or production

- 2 types: Oligopoly and Monopoly

3 Conditions for Oligopoly

1. Few LARGE sellers- top 3-4 companies/sellers handle 75% of

demand

2. Identical or VERY similar products - producers less willing to take chances

3. Difficult market entry- Large firms have already paid start-up costs

Oligopolies at Work

Typically try to use non-price competition T.V. Stations, Cars, Movie studios

Oligopolies At Work

INTERdependent pricing Firms set prices based on other

firms Price leaders: largest seller sets a

price and others follow

Oligopolies at Work

Collusion: when the major sellers set a price or production level Typically the price is above

equilibrium, but there are no cheaper substitutes

Oligopolies at Work

Cartels: an open form of collusion where production levels or prices are announced OPEC or DeBeers Usually short-lived because of

greed/self-interest

3 Conditions for Monopolies

1. Single Seller Total control of production and price setting

2. No reasonable substitutes Forces demand for good, even if prices are too

high 3. Difficult or Impossible Market Entry

Too high start-up costs or too technical field

Examples of Monopolies or near Monopolies

•Standard Oil, broken up in 1911

NFL – Convicted of being an illegal monopoly in 1980

•Currently under investigation.

•Potentially trying to form a monopoly in the Used Video Game market.

• Claiming ebay/amazon as competition

•Had competition from Livenation, but are currently under negotiations to buy Livenation

Not all Monopolies are “bad”

•Fayette county water authority is a “natural monopoly”

•The costs to society of having another competitor are too great

•The cost to build more rail lines would be tremendous just for someone to make a little bit of profit

Why not charge outrageous prices?

1. Consumer Demand: Increase in price of too much would cause demand of zero

2. Potential Competition: Startup costs are extremely high, but if prices got high enough, entrepreneurs would have incentive to enter

3. Government Regulation

No journal.

Get out the market structures sheet from yesterday.

Complete the market structure practice sheet

Business Organizations

GPS

SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy.

Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.

Business Organizations

3 basic business structures Sole Proprietorship – one person owns/manages Partnership – 2 or a small group Corporation – a group of shareholders

Each has various costs and benefits All types must deal with 4 general issues

Liability, life expectancy, financial options, and taxes

Sole Proprietorships

Advantages Low start-up costs Keeps all profits Full control Can respond to market

quickly Easy to discontinue

Disadvantages 100% Owner liability

Legal, debt, taxes, etc

Life expectancy of company

Limited access to resources

Partnerships

Advantages Low startup costs Take advantage of

specialization Larger pool of capital

Disadvantages Potential for conflict Unlimited liability

General partnership vs. limited liability

Corporations

Advantages Limited liability Much larger pool of

capital Take advantage of

specialization Prestige

Disadvantages Difficulty of startup

corporate charter, stocks

Double taxation The corporation is a

SEPARATE individual from the people who run it.

Loss of control More regulation

0

5000

10000

15000

20000

25000

Total receipts (inbillions)

# of firms (inthousands)

Non farmproprietorships

Partnerships

Corporations

What’s On the Test Specialization/Voluntary

Exchange Why do people trade? Why do we specialize?

Circular Flow Which direction do the arrows

flow? What are the components?

Market Structures What are the characteristics of

the 4? How does each structure

affect prices/profits? Business Organizations

Pros/Cons of each type of Organization

Supply/Demand How are prices set in a

market? Law of Supply/Law of

Demand RIPEN/GRENT What happens to

equilibrium price/quantity when supply/demand shift

Price Floors/Ceilings

Unit 3 Markets: not just for fleas and stocks!. Specialization and Voluntary Exchange.

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Transcript of Unit 3 Markets: not just for fleas and stocks!. Specialization and Voluntary Exchange.