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Unit II – Nature and Functions of Product Markets Objectives: NCEE Content Standard 7 – Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services. NCEE Content Standard 8 – Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives. NCEE Content Standard 9 – Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them. Vocabulary: (Big topics in bold) Law of Demand Demand Schedule Normal Goods Complementary Goods Supply Determinants of Supply Shortage Total Revenue Test Unit Elastic Determinants of Elasticity Quantity Demanded Demand Curve Inferior Goods Law of Supply Supply Schedule Market Equilibrium Disequilibrium Perfectly Inelastic Elastic Demand Determinants of Demand Substitute Goods Quantity Supplied Supply Curve Surplus Elasticity Inelastic Perfectly Elastic Numbers and Formulas: Price Elasticity of Demand Cross Price Elasticity Income Elasticity of Demand Price Elasticity of Supply Visuals: Supply/Demand Model and manipulations AP Microeconomics Activity Book (answers to Unit 1 and 2 M/C sample questions for Unit 2A) Unit 1: 4. C 6. B 8. B 30. E 31. B Unit 2: 2. D 3. A 4. D 7. C 8. E 10. A 13. C 15. E 17. E 19. A Unit IIA Calendar: Monday Tuesday 26 Unit 1 Test Post Test Discussion Wednesday 27 Hwk: Read Module 5 October 3 No School Determinants Hwk: Read Module 7 10 No School Elasticity 17 Friday 29 30 Markets Markets cont. Determinants Hwk: Unit 2A RP due Thurs., 10/13 Hwk: AP Micro Activity 1-8 Hwk: Read Module 6 4 5 Determinants 6 Markets Interact Hwk: AP Micro Hwk: AP Micro Activities 1-5, 1-7, Activity 2-1 1-9 11 12 13 No School Elasticity Hwk: Read Modules 47-48 Unit 2A Test Thursday 28 Hwk: AP Micro Activities 2-3, 2-4, 2-5 7 Markets Interact Hwk: Read Module 46 (p.461-464 only) 14 Elasticity Hwk: Review for Test 18 Post Test Discussion What you should know at the end of this unit? According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand slopes downward. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward. Demand and supply together set the price of a good and quantity sold. In addition to price, other non-price determinants impact how much consumers want to buy and how much producers want to sell, shifting the demand and supply curves. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise. The price elasticity of demand measures how much quantity demanded responds to changes in the price. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The price elasticity of demand is anywhere in the range from perfectly inelastic, meaning quantity demanded is unaffected by the price and the demand curve is a vertical line, to perfectly elastic, meaning there is a unique price at which consumers will buy as much or as little as they are offered and the demand curve is a horizontal line. If the price elasticity of demand is greater than 1, demand is elastic; if it is less than 1, demand is inelastic; if it is exactly 1, demand is unit-elastic. If price elasticity of demand is elastic, total revenue falls when the price increases and rises when the price decreases. If price elasticity of demand is inelastic, total revenue rises when the price increases and falls when the price decreases. The price elasticity of demand depends on the following determinants: whether there are close substitutes, the necessity of the good, price to budget percentage and the time horizon. Cross price elasticity of demand measures the effect of a change in one good’s price on the quantity of another good demanded. The income elasticity of demand is the percent change in income. The price elasticity of supply is the percent change in the quantity of a good supplied divided by the percent change in the price.