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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
GOVERNMENT
Taxes Taxes
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 Quantity Demanded
Description
Whatchanges it?
What does it look like?
Demand vs. Quantity Demanded
Demand Quantity Demanded
Description the amount of a good or service people are willing/able to buy at ALL possible pricesIt is a LINE, a series of points
Amount of a good/service people will buy at ONE priceIt is a POINT!!!!
Demand vs. Quantity Demanded
Demand Quantity Demanded
Whatchanges it?
One of 5 determinants from RIPEN
ONLY PRICE!
Demand vs. Quantity Demanded
Demand Quantity Demanded
What does it look like?(Increase)
Price (P)
Quantity
D
Price
Quantity (Q)
D1
P1
Q1
P2
Q2
D2
Supply vs. Quantity Supplied
Supply Quantity Supplied
Description
Whatchanges it?
What does it look like?
Supply vs. Quantity Supplied
Supply Quantity Supplied
Description amount of a good or service people are willing/able to sell at ALL possible pricesIt is a LINE, a series of points
Amount of a good/service people will sell at ONE priceIt is a POINT!!!!
Supply vs. Quantity Supplied
Supply Quantity Supplied
Whatchanges it?
One of 5 determinants from GRENT
ONLY PRICE!
Supply vs. Quantity Supplied
Supply Quantity Supplied
What does it look like?(Increase)
Price (P)
Quantity
S
Price
Quantity
S1 P2
Q1
P1
Q2
S2
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
Essential components Y axis = prices of good X axis = quantity of good
AXES MATTER! Demand line = D
Price (P)
Quantity (Q)
D
Demand line = D At $2, there is a
QUANTITY DEMANDED of 5
$2
5
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 Y axis = prices of good X axis = quantity of good Supply line = S
Price (P)
Quantity (Q)
S Supply line = S At a price of $2, there is a
QUANTITY SUPPLIED of 3
$2
3
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)
P
QD
$200
150
Market for Diamond Rings
Assume that a diamond ring costs $200
At $200 buyers are buying around 100 a day
If the price were $100, buyers would be buying 150 a day
100
$100
What happens if people’s income doubles?
Now, at $200, people want 150 rings.
What about at $100? Will people want more or less?
D2
PriceIF ALL THAT CHANGES IS PRICE,
then ONLY QUANTITY DEMANDED or SUPPLIED CHANGES!!!!!!!!
Q2
P
QD
P1
Q1
P2
RIPEN and GRENT“Determinants of Supply and Demand”
Determinants of Demand (Things that shift the entire line!)
R
IPEN
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 increasesSubstitutes: if price of substitute increases, demand for other good increases; if price of substitute decreases, demand for other good decreases
ncome – income increases, demand increases; income decreases, demand decreases
references – preferences increase, demand increases; preferences decrease, demand decreases
xpectations – expect higher prices in future, current demand increases expect lower prices in future, current demand decreases
umber of buyers – # of buyers increase, demand increases; # of buyers decrease, demand decreases
Determinants of Supply (Entire Line)
G
R
E
N
T
overnment decisionsTAXES – taxes increase, supply decreases; taxes decrease, supply increasesSUBSIDIES –subsidies increase, supply increases; subsidies decrease, supply decreasesREGULATIONS – regulations increase, supply decreases; regulations decrease, supply increases
esource prices or availability - •resource prices have an inverse relationship with supply•resource availability has a direct relationship with supply
echnology or training – direct relationship to supply
xpectations – expect to sell more, supply increases; expect to sell less, supply decreases; expect to sell at future higher prices, immediate supply decreases.
umber of producers – 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 COMPETITIVEPure Monopolistic Oligopoly Monopoly
Competition Competition
Competitive MarketsCompetitive Markets
2 Major Types of Competitive 2 Major Types of Competitive MarketsMarkets
Pure CompetitionPure Competition
Monopolistic CompetitionMonopolistic Competition
PURE COMPETITIONPURE COMPETITION
No single buyer or seller controls supply, No single buyer or seller controls supply, demand, or pricesdemand, or prices
There are 4 conditions for PCThere are 4 conditions for PC Many Buyers and SellersMany Buyers and Sellers Identical ProductsIdentical Products Informed BuyersInformed Buyers Easy Market Entry and ExitEasy Market Entry and Exit
1. Many Buyers/Sellers1. Many Buyers/Sellers
Each company or producer accounts for a Each company or producer accounts for a small portion of goodssmall portion of goods
Everyone acts INDEPENDENTLY, little or no Everyone acts INDEPENDENTLY, little or no teamwork among competitorsteamwork among competitors
2. Identical Products2. Identical Products
Buyers choose goods almost SOLELY Buyers choose goods almost SOLELY based on price, not qualitybased on price, not quality
Consumers are highly informed about Consumers are highly informed about productproduct
3. Informed Buyers3. Informed Buyers
Buyers will decide if prices are acceptableBuyers will decide if prices are acceptable This is possible because all the products are This is possible because all the products are
nearly identicalnearly identical Offers easy comparison between competitorsOffers easy comparison between competitors
4. Easy Market Entry4. Easy Market Entry
Extremely easy to enter the market and Extremely easy to enter the market and make a profitmake a profit Low start-up costs, few regulationsLow start-up costs, few regulations
Easy to switch between goods if you’re Easy to switch between goods if you’re already in the marketalready in the market
Real World PC?Real World PC?
Pure Competition is a Pure Competition is a modelmodel AGRICULTURE is closest to pure AGRICULTURE is closest to pure
competitioncompetition Many farmers, food is very similar, buyers Many farmers, food is very similar, buyers
are informedare informed Commodities also are close Commodities also are close
Gold, silver, dairy, etcGold, silver, dairy, etc
MONOPOLISTIC MONOPOLISTIC COMPETITIONCOMPETITION
Similar to pure competition in some areasSimilar to pure competition in some areas Many producersMany producers Fairly easy to enter market Fairly easy to enter market
Primary difference between pure competition Primary difference between pure competition is sellers try to DIFFERENTIATE their is sellers try to DIFFERENTIATE their products through advertisingproducts through advertising
Monopolistic Competition Monopolistic Competition (cont’d)(cont’d)
Competition based on things other than priceCompetition based on things other than price Quality, size, perks, color…Quality, size, perks, color… Advertising differences is keyAdvertising differences is key
Differences other than Price
Differences other than Price
What are these companies selling?
Problem with ProfitsProblem with Profits MC and PC face problem of non-sustainable profitsMC and PC face problem of non-sustainable profits
2 major problems2 major problems 1. No real control over price1. No real control over price
If price goes too high, consumers purchase from If price goes too high, consumers purchase from someone elsesomeone else
If profits are extremely large, other firms enter the If profits are extremely large, other firms enter the industry because it’s easy to get inindustry because it’s easy to get in
2. In MC, advertising constantly changes the 2. In MC, advertising constantly changes the playing fieldplaying field Consumers change back and forth from one brand to Consumers change back and forth from one brand to
another based on their preferencesanother based on their preferences SHORT RUN profits are possible with differentiationSHORT RUN profits are possible with differentiation
Journal 21Journal 21
Identify 3 different goods that are Identify 3 different goods that are monopolistically competitive (shoes, monopolistically competitive (shoes, hamburgers, etc)hamburgers, etc) For each good, identify 3 different For each good, identify 3 different brandsbrands Explain what each brand has that the other Explain what each brand has that the other
two don’t havetwo 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 Total control of production and price setting
2. No reasonable substitutes 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
•Standard Oil, broken up in 1911
NFL – Convicted of being an illegal monopoly in 1980
•Currently under investigation.
•Potentially trying to form a monopoly in the Used Video Game market.
• Claiming ebay/amazon as competition
•Had competition from Livenation, but are currently under negotiations to buy Livenation
Not all Monopolies are “bad”
•Fayette county water authority is a “natural monopoly”
•The costs to society of having another competitor are too great
•The cost to build more rail lines would be tremendous just for someone to make a little bit of profit
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
corporate charter, stocks
Double taxation The corporation is a
SEPARATE individual from the people who run it.
Loss of control More regulation
0
5000
10000
15000
20000
25000
Total receipts (inbillions)
# of firms (inthousands)
Non farmproprietorships
Partnerships
Corporations
What’s On the Test Specialization/Voluntary
Exchange Why do people trade? Why do we specialize?
Circular Flow Which direction do the arrows
flow? What are the components?
Market Structures 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