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The Principles of Our Market Economy. I. The Circular Flow of Economic Activity. What is the Circular Flow of Economic Activity?. A healthy market depends on a flow of resources, goods, and services. II. Expanding the Circular Flow. How is the Cicular Flow Expanded?.

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The Principles of Our Market Economy

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The principles of our market economy

The Principles of

Our Market Economy


I the circular flow of economic activity

I. The Circular Flow of Economic Activity

What is the Circular Flow of Economic Activity?

  • A healthy market dependson a flow of resources, goods, and services


Ii expanding the circular flow

II. Expanding the Circular Flow

How is the Cicular Flow Expanded?

  • You are involved in exchanges with multiple businesses!

  • Producers (business owners) need not just labor, but land and raw materials

    • Also tools, machines


Iii supply and demand

III. Supply and Demand

How are Supply and Demand Related?

  • Producers (buisness) and Individuals (buyers) act both as buyers and sellers

  • Both are involved in exchanging goods and services

  • In a Free Enterprise the Market Determines:

    • How much is being produced

    • The cost of a good or service

Competition


Iii supply and demand cont

III. Supply and Demand Cont.

  • When there is competition the market works according to the laws of supply and demand

    • What happens when people make choices!


The principles of our market economy

What do you think?

  • What determines the price of pizza, gasoline, a car wash, or other goods and services?


Iv the law of demand

IV. The Law of Demand?

How Does the Law of Demand Work?

  • tells us the quantity of a good that buyers wish to buy at each price

  • As price of a good or service goes down the quantity consumers wish to buy will increase

    • Therefore, the demand curve is downward-sloping


The daily demand curve for pizza in chicago

4

3

2

Demand

8

12

16

The Daily DemandCurve for Pizza in Chicago

Price

($ per slice)

Quantity

(1000s of slices per day)


Why do buyers purchase a greater quantity at lower prices and vice versa

Why do buyers purchase a greater quantity at lower prices and vice-versa?

  • The substitution effect

  • The income effect

  • Law of Diminishing Marginal Utility (extra satisfaction)


V buyers and sellers in markets

V. Buyers and Sellers In Markets

  • The Substitution Effect

    • The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes


The principles of our market economy

V. Buyers and Sellers In Markets

  • The Income Effect

    • The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power


The principles of our market economy

V. Buyers and Sellers In Markets

  • Diminishing Marginal Utility

    • The change in the quantity demanded of a good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed


The principles of our market economy

Will the opportunity cost of producing additional units of pizza increase or decrease?


Vi balancing cost and benefits

VI. Balancing Cost and Benefits

  • A producer’s cost is determined by how much it costs to produce an item

  • The price a buyer pays for each item = the benefit for the producer

    • The higher the price the better for the producer!


The daily demand curve for pizza in chicago1

4

3

2

Demand

8

12

16

The Daily DemandCurve for Pizza in Chicago

Price

($ per slice)

Quantity

(1000s of slices per day)


Why do buyers purchase a greater quantity at lower prices and vice versa1

Why do buyers purchase a greater quantity at lower prices and vice-versa?

  • The substitution effect

  • The income effect

  • Law of Diminishing Marginal Utility (extra satisfaction)


Vii buyers and sellers in markets

VII. Buyers and Sellers In Markets

  • The Substitution Effect

    • The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes


The principles of our market economy

VII. Buyers and Sellers In Markets

  • The Income Effect

    • The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power


The principles of our market economy

VII. Buyers and Sellers In Markets

  • Diminishing Marginal Utility

    • The change in the quantity demanded of a good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed.


The principles of our market economy

Will the opportunity cost of producing additional units of pizza increase or decrease?


Balancing cost and benefits

Balancing Cost and Benefits

  • A producer’s cost is determined by how much it costs to produce an item

  • The price a buyer pays for each item = the benefit for the producer

    • The higher the price the better for the producer!


The law of supply

The Law of Supply

How does the Law of Supply Work?

  • the quantity of a good that sellers wish to sell at each price


The daily supply curve for pizza in chicago

Supply

4

3

2

8

12

16

The Daily SupplyCurve for Pizza in Chicago

Price

($ per slice)

Quantity

(1000s of slices per day)


Market price

Market Price

  • The Price at which buyers and sellers agree to trade


Buyers and sellers in markets

Buyers and Sellers In Markets

  • Diminishing Marginal Utility

    • The change in the quantity demanded of a good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed.


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