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FREE ENTERPRISE &
Supply and Demand
At the end of class today,
for a grade:
1. Draw the supply and demand graph, with
these parts labeled:
supply line, price, quantity, demand line,
equilibrium price
2. When does a surplus occur?
3. When does a shortage occur?
Review Types of Economies
•
Fill in the blank using command economy,
traditional economy, market economy,
laissez faire, Karl Marx, Adam Smith, Profit
motive, central planners
1. In a _______________ custom and habit
determine the answers to the 3 economic
questions.
IF YOU CAN ANSWER
THESE QUESTIONS,
YOU UNDERSTAND SUPPLY
AND DEMAND!!!!!
1. If you were a candy store owner, would
you be more willing to sell candy at $1 a
piece or $2 a piece? Why?
2. If you were buying candy, would you be
more willing to BUY candy at $1 a piece or
at $2 a piece? Why?
Types of Economies Review
1. Which type of economy combines the market
economy and the command economy?
2. Which type of economy are economic decisions
based on customs and habits of the past?
3. Which type of economy does the government
control all aspects of production?
4. Which type of economy do individuals and firms
have the freedom to produce what they want?
• Free Market (Capitalism)
– Because we have a generally free market people
have the freedom to make money in any way they
choose. This can be called having “free
enterprise.”
– Invisible Hand: society benefits when
individuals can pursue their own interests
without interference from the government.
– Instead of the gov’t, supply and demand determines
prices, which determines who can buy certain
goods/services.
– ANSWER: Who determines
price in the command
economy?
– ANSWER: If you were
opening a business in the
free market how would you
decide what to make?
4 Characteristics of Free Enterprise
1. Individuals can choose how much they want to work
and what skills they want to have.
What do individuals think about when choosing a job?
2. Voluntary Exchange: people determine what and how
much they want to buy and sell.
If something is “voluntary” it means you are not forced.
3. Businesses are motivated by making as much profit as
possible.
What is this called? ___________ _______________
4. Prices are determined by the supply and demand for a
good.
•
a.
b.
c.
d.
Which economic system will most likely
promote individual initiative by
involving free enterprise?
socialism
Capitalism
Feudalism
communism
Which system has the most unregulated
flow of economic activity?
a. market
b. Mixed
c. Command
d. traditional
Law of Supply
• Businesses will produce more products
when they know they can sell them at a
higher price.
– Ex: If you know you can sell your sneakers
for $100 a pair you will want to make more
sneakers than if you could only sell them for
$10.
Law of Demand
• Consumers will demand (want) more of a
good when the price for the good is low.
– Ex: As a consumer you will want to buy more
sneakers if they cost $10 rather than if they
cost $100.
• So what will be the price of the
sneakers? $100, $10 or somewhere in
between?
The Supply and Demand Graph
• Where the 2 lines intersect is the price
the good will be sold at.
At $45 a consumer is
willing to buy (demands)
2 pairs, and the
producer is willing to
supply 2 pairs of
sneakers.
Supply
Price
$100
$45
Why wouldn’t a producer
sell the sneaker for
$100?
Demand
2.
Why wouldn’t a producer
sell the sneaker for $10?
1.
$10
1
2
Quantity
3
• Equilibrium price: the price where supply and
demand are equalthe highest price a good can
be sold at and not have a shortage (not enough) or
surplus (too much).
– The Equilibrium Price prevents producers from charging
too much for a good, because they will never sell it at a
high price if there is no demand.
Price
$100
Supply
$45
Equilibrium Price = ????
$10
Demand
1
2
Quantity
3
Shortage and Surplus
• What does it mean to have a shortage?
• What does it mean to have a surplus?
Shortage vs. Surplus
• What happens to the price if we have too much
supply and no demand for a good?
– SURPLUS: Supply is greater than demand = lower
price
• SALES at stores are usually the result of a surplus.
Shortage vs. Surplus
• What happens to the price if we have a lot of
demand but not enough supply of a good?
– SHORTAGE: Demand is greater than supply = higher
price
• GAS PRICES go up during gas shortages.
SUPPLY AND DEMAND PRACTICE
1. Draw a Supply and Demand Graph.
Label (supply “S”, demand “D”, equilibrium
price “E,” Price axis, and Quantity axis.
Price
Units
Demanded
Units
Supplied
$5
10
60
$4
18
51
$3
28
41
$2
38
29
$1
52
10
Gum Supply and Demand
2. What happens if demand is high
Graph and supply is low?
a)
When gum costs $1 what
quantity is demanded?
b) When gum cost $1 what
quantity is supplied?
c)
What is the shortage of gum
(demanded - supplied) ?
3. What happens is demand is low
but supply is high?
a)
Gum costs $3 what quantity
is demanded?
b) Gum costs $3 what quantity
is supplied?
c)
What is the surplus of gum
(supplied - demanded)?
Gum Supply and Demand
on the graph at what price
Graph4.theCircle
quantity supplied and demanded
are the same
(equal)?_____________
What is this point called?
_________________________
5. What would happen if the
government set the price of gum at
$4?
6. What would happen if the
government set the price of gum at
$2?
7. How does having price set by
supply and demand benefit
consumers?
Assignment:
1. Draw the supply and demand graph, with
these parts labeled:
supply line, price, quantity, demand line,
equilibrium price
Each Person must have their own
2. When does a surplus occur?
3. When does a shortage occur?
PREVIEW FOR TOMORROW
What might cause demand in a product to
increase?
Price
Quantity
PREVIEW FOR TOMORROW
What might cause demand in a product to
decrease?
Price
Quantity
PREVIEW FOR TOMORROW
What might cause SUPPLY in a product to
increase?
Price
Quantity
PREVIEW FOR TOMORROW
What might cause SUPPLY in a product to
decrease?
Price
Quantity