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The Principles of Our Market Economy. Chapter 14.1. By Circular Flow of Economic Activity. Circular Flow. Example: You want a new stereo system in your car, so you go to Best Buy and buy one. You exchange your money for a good that you want.

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the principles of our market economy

The Principles of Our Market Economy

Chapter 14.1


circular flow
Circular Flow


You want a new stereo system in your car, so you go to Best Buy and buy one. You exchange your money for a good that you want.

You also happen to work for the Geek Squad at Best Buy. You exchange your labor for an hourly wage.

These two exchanges are connected because you buy a stereo with the money you earn from working.

Creates a “FLOW”

in real life
In real life…

People exchange labor for wages and purchase from many businesses

American economy is based on this flow

All American businesses together: PRODUCERS

Turn to page 378, look at the diagram, & answer the following:

  • What are the 3 factors of production?
  • What is interest?
supply and demand
Supply and Demand

What is a market?

“The Market” determines:

  • How much of something will be produced (Is there a want or need for the item?)
  • The prices of the items produced (How much are people willing to pay for the item?)

Competition = market operates according the “laws” of supply and demand

law of demand
Law of Demand

Demand: The amount of a product or service that buyers are willing and able to buy at different prices.


  • Many people are buying the Iphone 5S
  • People are demanding many of the Iphone 5S
  • When deciding to buy something, you balance the cost to you with the benefit you will receive from it (the lower the price the more likely you will buy the item)
  • At a low price, more people will decide to buy the Iphone 5S (high demand)
  • At a high price, fewer people will buy the Iphone 5S

(low demand)

law of supply
Law of Supply

Supply: the amount of a product that producers are willing and able to offer at different prices.

Producers also balance the cost with the benefit

  • Cost: how much $ to produce the item
  • Benefit: how much a buyer will spend on the item


  • When the price of the Iphone 5S is high, more producers will want to produce the Iphone 5S because they will get more $
  • When the price of the Iphone 5S is low, fewer producers will want to produce the Iphone 5S because they will get less $
supply and demand1
Supply AND Demand

You must combine these two laws to understand the market. CANNOT HAVE ONE (S or D) W/O THE OTHER

Affect each other oppositely:

  • At higher prices, more product is made but less is demanded
  • At lower prices, less will be supplied, but more is demanded
market price
Market Price

The price at which buyers and sellers agree to trade

If you place supply and demand curves on a graph, the market price is the point at which the two lines meet.


Page: 380

How will a decrease in price affect the supply of strawberries?

AT $2.00 a basket, how many baskets of strawberries could be sold, and why?


Supply and Demand for iPhones at a

Local AT&T Store

1.) At approximately what market

price does it shows a balance

in the quantity of iPhones

supplied and the quantity of

demand being demanded?

Please indicate the number of

iPhones being supplied to

meet the demands.

2.) It is the holidays, the market

price for an iPod has shifted

from $300 to $400, please

explain the price change

effect on the supply and the

effect on the demand.

3.) Why do you think that the price

change from $300 to $400

affected the supply and

demand? In other words, what

are the reasons behind it?






Price per iPhone ($)











Number of iPhones Demanded

and supplied

supply and demand worksheet
Supply and Demand Worksheet

Complete the Supply and Demand Worksheet individually.

Go over answers as a class.

other influences
Other Influences

Demand can be influenced by more than just price

  • Example: Basic products like gas or milk
    • Why?
  • Example: Advertising, style of fashion, the way we as consumers view the product
    • Why?
entrepreneur a person who starts a business
Entrepreneur: A person who starts a business

A business: an organization that combines land, labor, and capital to produce goods or services

When starting a businessmust decide how their business is going to be owned.

Three basic types of business ownership in the USA:

  • Sole Proprietorship
  • Partnership
  • Corporation
sole proprietorship
Sole Proprietorship

Owned by one individual

Most common form70%


  • Freedom to run business the way they want
  • Profits go to just owner


  • Responsibility for all decisions and finances

Two or more people share ownership

In USA: law firms, medical groups, etc.

Advantages and disadvantages are the same as sole owner except:

  • More than one person shares the risks and rewards
  • Possibility of differences arise, which could ruin a business

Separate from the people who own it and legally as a single person

More than one person owns it

  • shares in a corporation = stocks
  • people who own stocks = stockholders


  • Lots of $ by selling stocks
  • Stockholders not responsible for corp’s debts
  • If corp fails, only lose the value of your stock


  • Limited by gov’t regulations
  • More difficult and

expensive to start

the rise of big business
The Rise of Big Business

Corporations dominate our economy90% of total sales in the USA


  • Can produce goods and services more efficiently
  • Can afford technology and machinery to produce faster
  • Resources to develop new products and production methods