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Economics EOCT Prep

Economics EOCT Prep. Microeconomics. Markets. In a Market Economy, SUPPLY and DEMAND provide signals that trigger production and consumption of goods and services WE, as consumers , are the demanders WE, as producers , are also the suppliers. Circular Flow of Economic Activity.

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Economics EOCT Prep

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  1. Economics EOCT Prep Microeconomics

  2. Markets • In a Market Economy, SUPPLY and DEMAND provide signals that trigger production and consumption of goods and services • WE, as consumers, are the demanders • WE, as producers, are also the suppliers

  3. Circular Flow of Economic Activity

  4. What is DEMAND? • The willingness and ability to purchase a good or service • The Law of Demand states: • Consumers will buy MORE of a good or service when its PRICE DECREASES • Consumers will buy LESS of a good or service when its PRICE INCREASES (DUH!!! – Right???)

  5. Imagine a product… Let’s say SODA (from the school drink machine) How many would you buy a week if they cost: $1.00 ? $1.50 ? $2.00 ? $3.00 ? $ .50 ?

  6. Demand Schedule

  7. Demand Curve

  8. What might cause Demand to Shift? • INCOME – as income increases, consumers purchase more (exception = inferior goods!) • CONSUMER EXPECTATIONS – if we expect the price of a good to change in the future, it impacts our current demand for the good (example = gas) • POPULATION – changes in the number of people impact demand for goods/services • CONSUMER TASTES & ADVERTISING – influences trends so demand is impacted

  9. Also… • Changes in the PRICE of RELATEDGOODS • Complements are two goods that are typically bought and used together (example = skis and ski boots) • Substitutes are goods used in place of one another (example = skis and snowboards)

  10. What is ELASTICITY of DEMAND? • Elasticity of Demand is a measure of how consumers react to a change in the PRICE of a good/service (how flexible they are) • Demand for a good that consumers NEED tends to be INELASTIC (not flexible) • Demand for a good that consumers can do without (perhaps there are substitutes) tends to be ELASTIC (flexible)

  11. Reviewing DEMAND • The law of demand states that • Consumers will buy more when a price increases • Price will not influence demand • Consumers will buy less when a price decreases • Consumers will buy more when a price decreases

  12. If the price of a good rises and incomestays the same, what is the effect on demand? • The prices of other goods drop • Fewer goods are bought • More goods are bought • Demand stays the same

  13. Which of the following statements is accurate? • When two goods are complementary, increased demand for one will cause decreased demand for the other. • When two goods are complementary, increased demand for one will cause increased demand for the other. • If two goods are substitutes, increased demand for one will cause increased demand for the other. • A drop in the price of one good will cause increased demand for its substitute.

  14. What does elasticity of demand measure? • An increase in the quantity available • A decrease in the quantity demanded • How much buyers will cut back or increase their demand when prices rise or fall • The amount of time consumers need to change their demand for a good

  15. What effect does the availability of many substitute goods have on the elasticity of demand for a good? • Demand is elastic • Demand is inelastic • Demand is unitary elastic • The availability of substitutes does not have an effect

  16. Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls What is SUPPLY? • According to the Law of Supply, suppliers will offer MORE of a good at a HIGHERPRICE.

  17. Supply Schedule

  18. Supply Curve Remember: If you are a PRODUCER, higher prices (as long as production costs remain constant) mean you make a bigger PROFIT!

  19. What is ELASTICITY of SUPPLY? • Elasticity of Supply is a measure of the way QUANTITY SUPPLIED reacts to a CHANGE in PRICE. • If supply is not very responsive to changes in price (perhaps it takes a long time to make the good), it is considered INELASTIC. • An ELASTIC supply is very sensitive to changes in price (the supply can be increased or decreased fairly easily).

  20. How do businesses determine how many people to hire? • They must know how the number of workers affects total production • The marginal product of labor is the change in output from hiring one additional worker

  21. Marginal Returns

  22. Changes in Supply • Any change in the COST of an input (like raw materials, machinery, or labor) will affect supply. • New technology can decrease costs and increase supply.

  23. Reviewing SUPPLY: • What is the law of supply? • The lower the price, the larger the quantity supplied • The higher the price, the larger the quantity supplied • The higher the price, the smaller the quantity supplied • The lower the price, the more manufacturers will produce the good

  24. What happens when the price of a good with elastic supply goes down? • Existing producers will expand and some new producers will enter the market • Some producers will produce less and others will drop out of the market • Existing firms will continue their usual output but will earn less • New firms will enter the market as older ones drop out

  25. What are diminishing marginal returns of labor? • Some workers increase output but others have the opposite effect • Additional workers increase total output but at a decreasing rate • Only a few workers will have to wait their turn to be productive • Additional workers will be more productive

  26. What affect does a rise in the costof raw materials have on the cost of a good? • It lowers the overall cost of production • The good becomes cheaper to produce • The good becomes more expensive to produce • This does not have any affect on the eventual price of a good

  27. Combining Demand and Supply • The point at which quantity demanded and quantity supplied come together is known as equilibrium

  28. Interactions between buyers and sellers will always push the market back toward EQUILIBRIUM.

  29. Price Ceilings • In some cases, the government steps in to control prices. • A PRICE CEILING is a maximum price that can be legally charged for a good • An example is rentcontrol, a situation where the government sets a maximum amount that can be charged for rent in an area

  30. Price ceilings create excessDEMAND. The difference between the artificial price and the equilibrium price is a SHORTAGE.

  31. Price Floors • A PRICE FLOOR is a minimum price, set by the government, that must be paid for a good or service. • An example is the minimumwage, which sets a minimum price that an employer can pay a worker for an hour of labor.

  32. Price floors create excess SUPPLY. The difference between the artificial price and the equilibrium price is a SURPLUS.

  33. The Role of Prices • Prices provide a language for buyers (consumers/demanders) and sellers (producers/suppliers) • They act as an INCENTIVES – help indicate relative scarcity • They act as SIGNALS – like a traffic light • They are more FLEXIBLE than production

  34. Reviewing D x S: • Equilibrium in a market is the point at which • Quantity supplied and quantity demanded are the same • Unsold goods begin to pile up • Suppliers begin to reduce prices • Prices fall below the cost of production

  35. What happens when any market is in disequilibrium and prices are flexible? • Market forces push toward equilibrium • Sellers waste their resources • Excess demand is created • Unsold perishable goods are thrown out

  36. What prompts efficientresourceallocation in a well-functioning market system? • Businesses working to earn a profit • Government regulation • The need for fair allocation of resources • The need to buy goods regardless of price

  37. MARKET STRUCTURES • These are ways production of goods and services in particular markets are organized (they mainly differ in terms of the # of firms in the market) • Perfect Competition • Monopolistic Competition • Oligopoly • Monopoly

  38. Perfect Competition • A market structure in which a LARGENUMBER of firms all produce the SAME product – this type of structure tends to be mostefficient • Manybuyers and sellers • Identical products • Informed buyers and sellers • Free market entry and exit

  39. BARRIERS to ENTRY • These are factors that make it difficult for new firms to enter a market • START-UP COSTS – the $ a business must pay before the product reaches customers • TECHNOLOGY – some markets require a high degree of technological sophistication (knowledge that inhibits entrepreneurs from entering the market)

  40. Monopolistic Competition • A market structure in which MANY companies compete to sell products which are SIMILAR but not identical. • Many firms • Few barriers to entry • Slight control over price • Differentiated product

  41. Monopolistically Competitive Companies often use NON-PRICE Competition to attract customers: • Characteristics of the product – size, color, shape, taste, etc. • Location of the sale – busy corner versus isolated • Level of service – better customer service • Advertising image – to create apparent differences; use of celebrities or fads

  42. Oligopoly • A market structure dominated by a FEW, LARGE, PROFITABLE firms. • Collusion may occur – when companies work together to set prices and production levels • Price-fixing – like Coke and Pepsi • Cartels may be established – producers formally coordinate prices and production

  43. Monopoly • A market dominated by a SINGLE seller of a product or service • Monopolies form when barriers prevent firms from entering the market with a single supplier • Start-up costs are high • They can take advantage of their power and charge higherprices • Natural Monopolies – like power and water; we allow these because they are more efficient • Newtechnology can destroy the power of a monopoly

  44. Government and Competition • Government policies keep firms from controlling the prices and supply of important goods. • Antitrustlawsencourage competition in the marketplace. • Regulates business practices • Breaks up monopolies • Blocks mergers • Preserves incentives

  45. Comparison of Market Structures:

  46. Reviewing Market Structures: • Which is NOT a condition for Perfect Competition? • Many buyers and sellers participate • Identical products are offered • Market barriers are high • Buyers and sellers are well-informed about goods and services

  47. A monopoly is • A market dominated by a single seller • A license that gives the inventor of a new product the exclusive right to sell it for a certain amount of time • An industry that runs best when one firm produces all the output • An industry where the government provides all the output

  48. An oligopoly is • An agreement among firms to charge one price for the same good • A formal organization of producers that agree to coordinate price and output • A way to attract customers without lowering the price • A market structure in which a few large firms dominate a market

  49. The purpose of both deregulation and antitrust laws is to • Promote competition • Promote government control • Promote inefficient commerce • Prevent monopolies

  50. BUSINESS ORGANIZATIONS • Businesses can be owned by individuals, families, or large groups of people. • Sole Proprietorship • Partnership • Corporation • Franchise

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