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Economics Unit 4, Lesson 1 The Price System (Markets) ©2012, TESCCC Potential Buyers Potential Sellers Markets The interaction of buyers and sellers determines the price and quantity of most goods in a market system. ©2012, TESCCC Buyers and sellers have opposite goals. Buyers want the lowest price. Sellers want the highest price. ©2012, TESCCC Markets Draw Supply & Demand Demand Schedule $ QD 10.00 60 20.00 40 30.00 20 ©2012, TESCCC Supply Schedule $ QS 10.00 20 20.00 40 30.00 60 Market $ 30 S EP 20 10 D 20 ©2012, TESCCC 40 EQ 60 Q With supply and demand both on graph, we now have a market. Market equilibrium – where quantity demanded and quantity supplied are equal ©2012, TESCCC Based on 2 Assumptions 1. Everything in market has a price. 2. Price is best measure to answer the three basic economic questions. ©2012, TESCCC Prices act as signals. Signals to adjust – Demand – Supply ©2012, TESCCC Disequilibrium QS = QD This creates a shortage or a surplus. ©2012, TESCCC Surplus • A price above equilibrium creates a surplus. • A surplus is when QS is greater than QD. ©2012, TESCCC Surplus Excess Supply QS > QD P S 30 EP 20 D QD ©2012, TESCCC 40 EQ Q QS Shortage • A price below equilibrium created a shortage. • Shortage is when QD is greater than QS. ©2012, TESCCC Shortage Excess Demand $ QD > QS S EP20 10 D QS ©2012, TESCCC 40 EQ QD Q Objectives 1. Identify the determinant that causes a change in equilibrium price. 2. Construct a market, and graph a change in supply and demand with new equilibrium. ©2012, TESCCC What does it take to make a market? • Buyer = demand • Seller= Supply Draw a market and label • P • Q • S&D • EP & EQ ©2012, TESCCC Product: Toothpaste $ EP S E D EQ ©2012, TESCCC Q Show what would happen if Crest has a very successful ad campaign. Change in D? or Change in S? ©2012, TESCCC Product: Toothpaste $ S EP E 1 1 D ©2012, TESCCC EQ 1 Q Product: Toothpaste $ S EP 2 EP E E 2 1 1 ©2012, TESCCC D EQ EQ D 2 1 Q What happened to EP? Increased To EQ? Increased So we can generalize and say if… D EP EQ ©2012, TESCCC Show what would happen if the price of seaweed goes up. Change in D? or Change in S? ©2012, TESCCC Product: Toothpaste $ S E EP 1 1 D ©2012, TESCCC EQ 1 Q Product: Toothpaste S2 $ S1 E EP 2 EP 2 E 1 1 D ©2012, TESCCC EQ EQ 1 Q This was caused by a change in the cost of inputs. Seaweed is a major ingredient of toothpaste. ©2012, TESCCC What happened to EP? Increased To EQ? Decreased So we can generalize and say if… S EP EQ ©2012, TESCCC Show what would happen if a new machine can harvest seaweed faster and cheaper. Change in D? or Change in S? ©2012, TESCCC Product: Toothpaste $ S EP E 1 1 D ©2012, TESCCC EQ 1 Q Product: Toothpaste $ S1 S2 E EP EP 1 2 1 D EQ1 ©2012, TESCCC 1 Q What happened to EP? Decreased What happened to EQ? Increased So we can generalize and say if… S EP EQ ©2012, TESCCC Show what would happen if the Surgeon General announced that toothpaste was harmful to your heart. Change in Demand or Change in Supply? ©2012, TESCCC Product: Toothpaste $ S1 E 1 D 1 ©2012, TESCCC Q Product: Toothpaste $ E EP2 P1 ©2012, TESCCC S E 1 D EQ2EQ 2 D 1 Q What happened to EP? What happened to EQ? ©2012, TESCCC Both decreased. We can generalize and say if… D EP EQ ©2012, TESCCC