Download How Markets Operate

Today’s Warm Up

Due to scarcity, resources are limited. We
can’t all have whatever we want, whenever we
want. How does a country like the U.S. decide
who is going to get what?
AP Microeconomics Curriculum
Part 2: Nature & Function of Product Markets
(Makes up 55-70% of the AP exam)

A. Supply and Demand (15–20%)
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Market equilibrium
Determinants of supply and demand
Price and quantity controls
Elasticity
Consumer surplus, producer surplus, and
allocative efficiency
 Tax incidence and deadweight loss

Markets
Today’s LEQ: How do markets operate?
Economic Systems

Economic systems address scarcity

What, how, and for whom to produce?
U.S. = mixed market economy
 Producers/Consumers (& limited
gov’t) answer these questions

Markets

The market is the most important
economic institution in a market
economy

Exist when buyers and sellers interact

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Can be local, national, or international
This interaction determines prices &
therefore allocates scarce goods and
services
Market Incentives

Prices send signals and provide
incentives to buyers and sellers

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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

For example, what happened
when the price of gas exceeded
$4.00 a gallon?
Laugh if you get this joke… PLEASE.
Graphing Supply

Law of Supply:

When price
increases
(decreases), the
quantity supplied
increases
(decreases)
Graphing Demand

Law of Demand:

When price
increases
(decreases),
quantity demanded
decreases
(increases)
Equilibrium Price
(Market Clearing Price)

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
Game Time!
“A Classroom Market for Crude Oil”

Half of you will be buyers of barrels of crude
oil, half of you will be sellers
DO NOT REVEAL THE PRICE ON YOUR CARD AT ANY TIME!
To Win:
Buyers: try to buy a barrel
of crude oil at the lowest
possible price. You should
not buy for more than the
price on your card.
Sellers: try to sell a barrel of
crude oil at the highest
possible price. You should
not sell for less than the
price on your card.
A few things worth mentioning…
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Any buyer can interact with any seller.
Goal of both buyers and sellers is to make as much money as
you can.
You are free to make as many transactions in a round as time
permits.
All transaction prices must be made in whole dollar
increments.
When a transaction is made, both the seller and the buyer
report the agreed upon price to the recorder. HINT: Watch the
tally sheet so you know what prices are being paid for oil...
After each transaction, turn in your card and receive a new
one, reenter the marketplace, and resume
Game Recap

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At what price was crude oil most frequently
sold in each round?
In which round did the greatest spread of
prices occur?
Why did the prices become more clustered in
later rounds?
Did buyers and sellers determine the final
price for crude oil?
How did competition among sellers and buyers
influence price?
Activities 4 & 5
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Construct the graph by placing dots at the points
that correspond to all the combination of prices
and quantities shown in the supply schedule on
Activity 4
Do the same, but use small crosses instead of
dots, for the demand schedule
Connect the dots to produce the supply schedule
Connect the crosses to produce the demand
schedule
Label each curve
Surplus

If price is above the
equilibrium price,
sellers would want to
sell more than buyers
would want to buy

QS > QD
Shortage

If price is below the
equilibrium price,
buyers would want to
buy more than sellers
would want to sell

QD > QS
Complete Activity 6
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What is the market clearing price for bananas?
In the marketplace, how will this price be
determined? Remember, the store managers
try to sell their bananas at 89 cents per pound?
Describe an example of a surplus or a shortage
that you have experienced in the marketplace,
or that you have read about or heard about
from someone else.
Today’s Exit Ticket

Answer today’s LEQ on the back of Activity
6. Be sure to use all of the key vocabulary
listed below:

Demand, Market, Equilibrium, Shortage, Supply,
Surplus