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Transcript
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.