HOW DOES A MARKET ECONOMY REQUIRE
THESE FORCES TO WORK, AND WORK WELL?
RE-CAP
 IN A MARKET ECONOMY:
 COMAPNIES/BUSINESSES PRODUCE GOODS OR SERVICES
 COMPANIES/BUSINESSES WANT PROFITS
 CONSUMERS WANT GOODS OR SERVICES
 COMPANIES/BUSINESSES COMPETE TO GIVE CONSUMERS
WHAT THEY WANT
 CONSUMERS WANT TO GET A “BARGAIN”
 FREE MARKET ALLOWS FOR COMPETITION AND
PRODUCTION OF GOODS DEMANDED BY THE CONSUMERS
 REGULATIONS ARE FEW SINCE “LAISSEZ-FAIRE” IS OBSERVED
WHAT IS DEMAND?
 THE DESIRE TO PURCHASE SOMETHING AT A
SPECIFIED PRICE AND TIME ACCOMPANIED BY
THE ABILITY AND WILLINGNESS TO PAY
 DEMAND AND WANT ARE NOT THE SAME THING
 YOU MAY WANT A NEW CAR BUT….
 YOU DEMAND IT ONLY WHEN YOU CAN ACTUALLY
BUY IT
DEMAND
 JOE HAS A CAR WHICH REQUIRES GASOLINE
 GAS PRICES ARE AS FOLLOWS:
PRICE PER GALLON
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
GALLONS PER WEEK
5
10
15
20
25
30
GAS DEMAND/DEMAND CURVE
WHAT HAPPENED?
 PEOPLE BUY LESS OF SOMETHING AT HIGHER PRICES
THAN THEY DO AT LOWER PRICES
 THIS IS CALLED……PRICE EFFECT or LAW of DEMAND
PRICE ELASTICITY OF DEMAND
Also known as : ELASTICITY
or – ELASTICITY OF DEMAND
WHAT IS THIS?
 IF WE NEED IT, WE BUY IT
 IF THE PRICE IS LOW AND WE NEED IT, WE
BUY LOTS OF IT
 IF THE PRICE CHANGES – EVEN UP TO 200%
AND WE NEED IT, WE STILL BUY IT…..
 WHAT IF WE DON’T NEED IT – WE JUST
WANT IT?
H2O SCENARIO AT THE MALL
 IN THE MALL I’M THIRSTY – I NEED…. WATER
 I’M EXPECTING TO PAY = $1.00 BUT THE WATER = $2.00
WILL I BUY THE WATER?
Yes I will – WHY?
T-SHIRT SCENARIO AT THE MALL
 H&M – STORE FOR FAIRLY INEXPENSIVE YET TRENDY STUFF
HAS T-SHIRTS FOR SALE
 I EXPECT TO PAY $10 FOR A T-SHIRT THERE
 BUT THE T-SHIRT IS ACTUALLY $15
WILL I BUY THE T-SHIRT?
NO I WON’T– WHY NOT?
ELASTIC vs. INELASTIC
WANTS: LUXURY GOODS
 LESS LIKELY TO BUY THESE
GOODS IF THE PRICE IS HIGH
 BUT IF PRICE DROPS….MAYBE
WE’LL BUY
NEEDS: NECESSITIES
 WILL BUY THESE GOODS
EVEN IF PRICE CHANGES –
BECAUSE WE NEED THEM!
FACTORS OF ELASTICITY
UNLESS THERE ARE SUBSTITUTES for
particular goods or services, we identify
goods as ELASTIC or INELASTIC
WHEN a GOOD or SERVICE has no
SUBSTITUTE – it becomes INELASTIC
ANOTHER WAY TO LOOK AT IT:
 CONSIDER ELASTIC AS A CHANGE YOU ARE
RESPONSIVE TO
 CONSIDER INELASTIC AS A CHANGE YOU ARE
IRRESPONSIVE TO
SUPPLY in all of this…..
 PRICE IS CHANGED BY DEMAND –
 PRICE DOES NOT CHANGE SUPPLY –
SUPPLY CHANGES PRICE
BOOK SCENARIO
 THERE IS AN ECONOMICS BOOK WITH ALL THE
ANSWERS TO YOUR FRIDAY QUIZZES
 I ONLY HAVE ONE COPY – MY SUPPLY IS LOW
 HOW MUCH WOULD YOU PAY FOR THE BOOK?
 MS. GOOD COMES IN WITH 100 OF THESE BOOKS
– HOW MUCH WOULD YOU PAY FOR THE BOOK?
 WHAT CHANGES????
WHERE SUPPLY AND DEMAND
COLLIDE….
WHEN SUPPLY AND DEMAND
INTERSECT – WE HAVE
MARKET EQUILIBRIUM ALSO
KNOWN AS “THE IDEAL PRICE”
REAL WORLD ECO….
OPEC – ORGANIZATION FOR
PETROLEUM EXPORTING COUNTRIES
RESTRICTS THE SUPPLY OF OIL TO
ALLOW THE PRICE TO GO UP