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The Principles of Our Market Economy

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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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Presentation Transcript
slide1

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!
slide6

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
slide11

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
slide12

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
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
slide18

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
slide19

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.
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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