Today’s LEQ: How do markets operate? The market is the most important economic institution in a market economy Markets exist when buyers and sellers interact This interaction determines prices & therefore allocates scarce goods and services Prices send signals and provide incentives to buyers and sellers Think: What would happen if the price of the average flat screen TV jumped to $30,000? When supply or demand changes, market prices adjust, affecting incentives Think: What happens to gas prices around peak vacation times? Market: Doughnuts Law of Supply: When price increases (decreases), the quantity supplied increases (decreases) Market: Doughnuts Law of Demand: When price increases (decreases), quantity demanded decreases (increases) Market: Doughnuts The market settles at this price and quantity QS = QD Why? At this point of intersection, buyers and sellers agree on both price and quantity If price is above the equilibrium price, sellers would want to sell more than buyers would want to buy QS > QD If price is below the equilibrium price, buyers would want to buy more than sellers would want to sell QD > QS Answer in your notes & be ready to share: Imagine the equilibrium price for a can of tuna is $2.00. Bumblebee Tuna sets their price at $3.00 a can. Will this result in a shortage or surplus of tuna? How do you know? Be sure to graphically represent your answer. Answer in your notes & be ready to share: Imagine the equilibrium price for a can of tuna is $5.00. Bumblebee Tuna sets their price at $3.00 a can. Will this result in a shortage or surplus of tuna? How do you know? Be sure to graphically represent your answer. Not all markets are ones in which price is allowed to move freely – government may set some price controls Prices set by a law differ from the equilibrium price This creates inefficiencies in the market as a shortage or surplus will always occur PRICE CEILING (MAX. PRICE) A shortage will always PRICE FLOOR (MIN. PRICE) A surplus will always result result QS < QD QS > QD Price is set < Equilibrium Price is set > Equilibrium Inefficiencies: Consumer Inefficiencies: Suppliers demand is not being met since price serves as a disincentive to producers are wasting resources by producing too much Rules establishing price don’t change the basic rule that people act in their own best self-interest However, new rules (price controls) may alter available options Consumers may make different choices than what they would have in the absence of rules In your notes, justify why equilibrium is the most efficient place to be and be ready to share. Demand = the total amount consumers are willing and able to buy at all prices. Demand Curve = the graphical representation of what consumers are willing and able to buy. Law of Demand: As price increases (decreases), quantity demanded decreases (increases). P Q P Q Supply = the total amount of a good or service producers are able to make at all prices Supply curve = the graphical representation of a good or service producers are able to make at all prices. Law of Supply: as price increases (decreases) quantity supplied increases (decreases) P Q P Q Some factors cause supply and demand to shift; represented by the movement of the entire curve Changes in QS or QD are represented by movement along the corresponding curve Tastes and fads Income Number of buyers Future price expectations Price and availability of: Substitutes (i.e. Coke and Pepsi) Compliments (i.e. peanut butter and jelly) Person A – complete side A Explain your answer to Person B Person B will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong Person B – Complete side B Explain your answer to Person A Person A will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong Alternate until all questions have been completed. Price of land, labor or capital (factors of production) Technology Number of other sellers Price of other goods I could produce Tax policy Person A – complete side A Explain your answer to Person B Person B will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong Person B – Complete side B Explain your answer to Person A Person A will say “Yes, that’s correct! Great job!”… Or, they will explain what you did wrong Alternate until all questions have been completed. “IRDL” will help you! INCREASE = RIGHT DECREASE = LEFT Scenario 1: The cast of the Jersey Shore passes away in a tragic airplane crash. What happens to the market for tanning oil? Scenario 2: The assembly line was developed and cars were manufactured much more efficiently than in the past. Failed his economic assignment (probably because he was in jail). Help him understand what he did wrong. In small groups, come up with a scenario that would cause either supply or demand to shift. On poster paper, write down the scenario and draw the basic structure of the supply and demand graph making sure to label all of the following: Price, Quantity, Supply, Demand, Equlibrium On a separate sheet of paper create an answer key that accurately shows the shift in supply or demand. Due at the start of our next class!!! Create a multiple choice test item for the state assessment that assesses the skills covered during our economics refresher today and yesterday. Create a problem with four answer choices, one that is correct and three that are incorrect. Make sure that the incorrect responses incorporate errors frequently made by students.