Download Unit 3: Markets, not just for fleas and stocks!

Unit 3
Markets: not just for
fleas and stocks!
Specialization and
Voluntary Exchange
Specialization

Specialization: people/companies learn and
practice a small set of skills then work or
trade with others with different skills to
produce something


Improves efficiency/productivity
The assembly line idea
Why does specialization work?

Skills are developed at a deeper level


people become “experts” in their field
Costs are cut because time needed to produce
is decreased
Training can be more focused and in-depth
Remember: People, Stores & industries specialize

Examples of specialization

Doctors – cardiologists, dermatologists,
dentists, podiatrists, rhinologists
Examples of specialization

Teachers – grade level, subject, coaches

Stores at the mall – food court, hats,
electronics, shoes, clothes

Write two examples of specialization in each
of these areas:

Restaurant
Movie
Courts
How does specialization relate
to voluntary exchange?



Because we specialize, we rely on others for
the things we don’t produce (CAUSE AND
EFFECT!)
In an exchange, BOTH sides are looking to
gain something
BOTH sides gain in VOLUNTARY, NON-
FRAUDULENT EXCHANGE
How does each side gain in
these potential transactions?
LAWYER
Circular Flow
GPS



SSEMI1 The student will describe how
households, businesses, and governments are
interdependent and interact through flows of
goods, services, and money.
Illustrate by means of a circular flow diagram, the
Product market; the Resource market; the real flow
of goods and services between and among
businesses, households, and government; and the
flow of money.
Explain the role of money and how it facilitates
exchange.
Components of the circular flow








Product market
Factor (resource) market
Households
Businesses
Government
Money
Goods/services
Resources
Taxes
Taxes
GOVERNMENT
Goods and Services
Supply and Demand
GPS



SSEMI2 The student will explain how the
Law of Demand, the Law of Supply,
prices, and profits work to determine
production and distribution in a market
economy.
Define the Law of Supply and the Law of
Demand.
Describe the role of buyers and sellers in
determining market clearing price.
Demand vs. Quantity
Demanded
Demand
Description
What
changes
it?
What
does
it
look
like?
Quantity Demanded
Demand vs. Quantity
Demanded
Demand
Description
Quantity Demanded
the amount of a
Amount of a
good or service
good/service people
people are willing/able will buy at ONE
to buy at ALL possible price
prices
It is a POINT!!!!
It is a LINE, a series
of points

Demand vs. Quantity
Demanded
Demand
What
changes
it?
One
of 5
determinants from
RIPEN
Quantity Demanded
ONLY
PRICE!
Demand vs. Quantity
Demanded
Demand
What
does
it
look
like?
(Increase)
Quantity Demanded
Price
Price (P)
P1
P2
D1
Quantity
(Q)
D2
D
Q1 Q2 Quantity
Supply vs. Quantity Supplied
Supply
Description
What
changes
it?
What
does
it
look
like?
Quantity Supplied
Supply vs. Quantity Supplied
Supply
Description
amount
of a good or
service people are
willing/able to sell at
ALL possible prices
It is a LINE, a series
of points
Quantity Supplied
Amount
of a
good/service people
will sell at ONE
price
It is a POINT!!!!
Supply vs. Quantity Supplied
Supply
What
changes
it?
One
of 5
determinants from
GRENT
Quantity Supplied
ONLY
PRICE!
Supply vs. Quantity Supplied
Supply
What
does
it
look
like?
(Increase)
Quantity Supplied
Price
Price (P)
S1
S2
S
P2
P1
Quantity
Q1
Q2
Quantity
Demand

amount of a good or service that consumers
are willing and able to purchase at various
prices

this can be represented by a graph or by a table

DIFFERENT THAN QUANTITY DEMANDED

QUANTITY DEMANDED – amount a consumer is
willing and able to purchase at a SPECIFIC price
Demand Graph
Essentialline
components
Demand
=D

Price (P)
 $2,
Y axis
= prices
At
there
is a of good
 X axis = quantity
of good
QUANTITY
DEMANDED
of 5 AXES MATTER!

Demand line = D
$2
D
5 Quantity (Q)
Law of Demand
THERE IS AN INVERSE RELATIONSHIP
BETWEEN PRICE and QUANTITY
DEMANDED
Why?



the more expensive something becomes, the more
likely people are to find a substitute
diminishing marginal utility
Supply

amount of a good or service that producers
are willing and able to sell at various prices

this can be represented by a graph or by a table

DIFFERENT THAN QUANTITY SUPPLIED

QUANTITY SUPPLIED – amount a producer is
willing and able to sell at a SPECIFIC price
Supply Graph



Essential components Price (P)
 Y axisline
= prices
Supply
= S of good
 X
= quantity
of good
At
a axis
price
of $2, there
is a
 Supply lineSUPPLIED
=S
QUANTITY
of
3
S
$2
3
Quantity (Q)
Law of Supply
THERE IS A DIRECT RELATIONSHIP
BETWEEN PRICE AND QUANTITY
SUPPLIED
Why?


the higher the price, the more likely the chance for
a greater profit to be made
DEMAND SHIFTS (IRDL)

Market for Diamond Rings

P

$200
What happens
Assume
that a diamond
if people’sring
costs $200
income
doubles?
At $200
Now,
at $200,
buyerspeople
are buying
want
around
150
rings.
100 a day
If the price
What
aboutwere
at $100?
$100,Will
buyers
would be
people
want
buying
more150
or less?
a day
$100
D
100
150
D2
Q
Price

IF ALL THAT CHANGES IS PRICE,
then ONLY QUANTITY DEMANDED
or SUPPLIED CHANGES!!!!!!!!
P
P1
P2
D
Q1
Q2
Q
RIPEN and GRENT
“Determinants of Supply
and Demand”
Determinants of Demand
(Things that shift the entire line!)
 R elated goods (Complements and Substitutes)
Complements: if price of complement increases, demand for the other
good decreases; if price of the complement decreases, demand for the
other good increases
Substitutes: if price of substitute increases, demand for other good
increases; if price of substitute decreases, demand for other good
decreases
 Income – income increases, demand increases; income decreases, demand
decreases
 Preferences – preferences increase, demand increases; preferences
decrease, demand decreases
 E xpectations – expect higher prices in future, current demand
increases expect lower prices in future, current demand decreases
 Number of buyers – # of buyers increase, demand increases; # of buyers
decrease, demand decreases
Determinants of Supply (Entire Line)

G

R esource prices or availability -
overnment decisions
TAXES – taxes increase, supply decreases; taxes decrease, supply increases
SUBSIDIES –subsidies increase, supply increases; subsidies decrease, supply
decreases
REGULATIONS – regulations increase, supply decreases; regulations decrease,
supply increases
•resource prices have an inverse relationship with supply
•resource availability has a direct relationship with supply

– expect to sell more, supply increases; expect to
E xpectations
sell less, supply decreases; expect to sell at future higher prices,
immediate supply decreases.

N umber of producers – direct relationship to supply

T echnology or training – direct relationship to supply
GPS




SSEMI2 The student will explain how the Law of
Demand, the Law of Supply, prices, and profits
work to determine production and distribution in
a market economy.
Describe the role of buyers and sellers in
determining market clearing price.
Illustrate on a graph how supply and demand
determine equilibrium price and quantity.
Explain how prices serve as incentives in a market
economy.
GPS





SSEMI2 The student will explain how the Law of
Demand, the Law of Supply, prices, and profits
work to determine production and distribution in
a market economy.
Define the Law of Supply and the Law of Demand.
Describe the role of buyers and sellers in
determining market clearing price.
Illustrate on a graph how supply and demand
determine equilibrium price and quantity.
Explain how prices serve as incentives in a market
economy.
GPS




SSEMI3 The student will explain how markets,
prices, and competition influence economic
behavior.
Identify and illustrate on a graph factors that cause
changes in market supply and demand.
Explain and illustrate on a graph how price floors
create surpluses and price ceilings create
shortages.
Define price elasticity of demand and supply.
Market Structures
GPS


SSEMI4 The student will explain the
organization and role of business and
analyze the four types of market
structures in the U.S. economy.
Identify the basic characteristics of monopoly,
oligopoly, monopolistic competition, and pure
competition.
Market Structures
MOST COMPETITIVE
LEAST COMPETITIVE
Pure
Competition
Oligopoly
Monopolistic
Competition
Monopoly
Competitive Markets
2 Major Types of Competitive
Markets

Pure Competition

Monopolistic Competition
PURE COMPETITION


No single buyer or seller controls supply,
demand, or prices
There are 4 conditions for PC




Many Buyers and Sellers
Identical Products
Informed Buyers
Easy Market Entry and Exit
1. Many Buyers/Sellers


Each company or producer accounts for a
small portion of goods
Everyone acts INDEPENDENTLY, little or no
teamwork among competitors
2. Identical Products
Buyers choose goods almost SOLELY
based on price, not quality
 Consumers are highly informed about
product

3. Informed Buyers


Buyers will decide if prices are acceptable
This is possible because all the products are
nearly identical

Offers easy comparison between competitors
4. Easy Market Entry

Extremely easy to enter the market and make
a profit


Low start-up costs, few regulations
Easy to switch between goods if you’re
already in the market
Real World PC?


Pure Competition is a model
AGRICULTURE is closest to pure
competition


Many farmers, food is very similar, buyers
are informed
Commodities also are close

Gold, silver, dairy, etc
MONOPOLISTIC
COMPETITION

Similar to pure competition in some areas



Many producers
Fairly easy to enter market
Primary difference between pure competition
is sellers try to DIFFERENTIATE their
products through advertising
Monopolistic Competition
(cont’d)

Competition based on things other than price


Quality, size, perks, color…
Advertising differences is key
Differences other than Price
Differences other than Price
What are these companies
selling?
Problem with Profits

MC and PC face problem of non-sustainable profits
 2 major problems

1. No real control over price



If price goes too high, consumers purchase from
someone else
If profits are extremely large, other firms enter the
industry because it’s easy to get in
2. In MC, advertising constantly changes the
playing field


Consumers change back and forth from one brand to
another based on their preferences
SHORT RUN profits are possible with differentiation
Journal 21

Identify 3 different goods that are
monopolistically competitive (shoes,
hamburgers, etc)


For each good, identify 3 different brands
Explain what each brand has that the other
two don’t have
Imperfect Competition
Imperfectly Competitive
Markets
Unlike competitive markets,
firms in imperfectly competitive
markets may be able to set
prices or production
- 2 types: Oligopoly and
Monopoly
-
3 Conditions for Oligopoly
1. Few LARGE sellers
- top 3-4 companies/sellers handle 75% of
demand
2. Identical or VERY similar products
- producers less willing to take chances
3.
Difficult market entry
- Large firms have already paid start-up costs
Oligopolies at Work

Typically try to use non-price
competition

T.V. Stations, Cars, Movie studios
Oligopolies At Work

INTERdependent pricing
 Firms set prices based on other
firms
 Price leaders: largest seller sets a
price and others follow
Oligopolies at Work

Collusion: when the major sellers
set a price or production level
 Typically the price is above
equilibrium, but there are no
cheaper substitutes
Oligopolies at Work

Cartels: an open form of collusion
where production levels or prices
are announced
 OPEC or DeBeers
 Usually short-lived because of
greed/self-interest
3 Conditions for Monopolies

1. Single Seller


2. No reasonable substitutes


Total control of production and price setting
Forces demand for good, even if prices are too
high
3. Difficult or Impossible Market Entry

Too high start-up costs or too technical field
Examples of Monopolies or
near Monopolies
•Currently under
investigation.
NFL
–
•Potentially trying
Convicted
to form a of
being
an in the
monopoly
•Standard
Oil,
Used Video
illegal
upmarket.
in but
Game
monopoly
in
•Had competition frombroken
Livenation,
1911
1980
are currently under negotiations
to
• Claiming
ebay/amazon as
buy Livenation
competition
Not all Monopolies are “bad”
•The cost to build
more rail lines
would be
tremendous just
for someone to
make a little bit of
profit
•Fayette county
water authority is a
“natural monopoly”
•The costs to
society of having
another competitor
are too great
Why not charge outrageous
prices?



1. Consumer Demand: Increase in price
of too much would cause demand of zero
2. Potential Competition: Startup costs
are extremely high, but if prices got high
enough, entrepreneurs would have
incentive to enter
3. Government Regulation
No journal.
Get out the market structures sheet
from yesterday.
Complete the market structure practice
sheet
Business Organizations
GPS


SSEMI4 The student will explain the
organization and role of business and
analyze the four types of market
structures in the U.S. economy.
Compare and contrast three forms of
business organization—sole proprietorship,
partnership, and corporation.
Business Organizations

3 basic business structures





Sole Proprietorship – one person owns/manages
Partnership – 2 or a small group
Corporation – a group of shareholders
Each has various costs and benefits
All types must deal with 4 general issues

Liability, life expectancy, financial options, and taxes
Sole Proprietorships





Advantages
Low start-up costs
Keeps all profits
Full control
Can respond to market
quickly
Easy to discontinue

Disadvantages
100% Owner liability



Legal, debt, taxes, etc
Life expectancy of
company
Limited access to
resources
Partnerships



Advantages
Low startup costs
Take advantage of
specialization
Larger pool of capital


Disadvantages
Potential for conflict
Unlimited liability

General partnership vs.
limited liability
Corporations




Advantages
Limited liability
Much larger pool of
capital
Take advantage of
specialization
Prestige

Disadvantages
Difficulty of startup


Double taxation



corporate charter, stocks
The corporation is a
SEPARATE individual
from the people who run
it.
Loss of control
More regulation
25000
20000
15000
Non farm
proprietorships
Partnerships
10000
Corporations
5000
0
Total receipts (in
billions)
# of firms (in
thousands)
What’s On the Test

Specialization/Voluntary
Exchange



Circular Flow



Which direction do the arrows
flow?
What are the components?
Market Structures



Why do people trade?
Why do we specialize?
What are the characteristics of
the 4?
How does each structure
affect prices/profits?
Business Organizations

Pros/Cons of each type of
Organization

Supply/Demand





How are prices set in a
market?
Law of Supply/Law of
Demand
RIPEN/GRENT
What happens to
equilibrium price/quantity
when supply/demand
shift
Price Floors/Ceilings