What is true of the role of government in production in a market economy?

The government does not mandate the production of goods; no one is assigned to or made to produce certain goods or services

What causes goods and services to be offered in market economies?

Whatever goods or services consumers demand, there will always be someone willing to supply (produce) it

What motivates producers to produce?

The ability to make a profit: if they see a way to make a profit, they will take advantage of it

What governs economic decisions in a market economy?

self-interest: people pursuing what is best for themselves

In a market economy what are people's actions based on?

Incentives (anticipated positive outcomes/ benefits) determined by cost-benefit analysis

COST-BENEFIT ANALYSIS

Looking at the costs and benefits of a choice and deciding if the benefits (positive outcomes) outweigh the costs (negative outcomes)

What happens if either the cost or benefit of an activity change?

If the cost is raised, or the benefit is reduced, people do less of that activity

THEORY OF SUPPLY AND DEMAND

Theory of how markets work: price is determined by the interaction of supply and demand; in a market economy the unit price of a good or service will vary until the equilibrium price is met where quantity supplied equals quantity demanded

market

Buyers and sellers conducting business; an exchange

What can markets do?

Provide information to consumers and producers about price

What type of information does a price convey?

1) Cost of production

2) Wants of consumers

If either change price changes

What determines the price of a good in a market economy?

Supply and Demand

demand

the amount of a good that consumers are willing and able to buy at a given price

What must be true in order for someone to demand a good?

Must plan to buy it:

1) Must have the money to buy it

2) The ability to buy it

3) The willingness to buy it

"Willing" and "able"

What is the difference between wants and demands?

Wants: unlimited wishes for goods and services; many will not be satisfied due to scarcity

Demands: what people are actually willing and able to buy

What determines demand?

Price

PRICE

the amount of goods or money that must be given up in exchange for something

MONEY PRICE

What most people refer to: the amount of money it will take to purchase something

RELATIVE PRICE

What economists often use to define the price of goods; measured in terms of others goods (how much of other goods you give up to get good)

What does it mean when it is predicted that a price will fall?

Price will fall relative to the average price of other goods and services; not that its money price will fall (it might)

What is demand measured in terms of?

Quantity demanded

quantity demanded

the amount of a good that consumers plan to buy at a given price during a specific time

what consumers plan to buy, not what they actually buy

What is true about the amount of goods consumers plan to by vs. the amount they actually buy?

Actual quantity bought depends on how much producers offer for sale

Consumers can demand more goods than is offered for sale

LAW OF DEMAND

law that states that, all other things remaining the same (5 other factors don't fluctuate), quantity demanded varies inversely with price

-demand will decrease when the price increases

-demand will increase when the price decreases

According to the law of demand what happens when the price of a good increases?

If the price increases, demand decreases.

This is because as a price rises, people are willing and able to buy less of that good.

According to the law of demand what happens when the price of a good decreases?

When price decreases, the demand increases.

This is because as the price of a good is reduced, people are willing and able to buy more of that good.

How is the law of demand illustrated?

On a demand curve

What does a demand curve look like?

What does a demand curve show?

The relationship between quantity demanded of a good and its price

Characteristic of a demand curve?

As the price (y-axis) increases (move up), the demand (x-axis) decreases (move left).

As the price (y-axis) decreases (move down), the demand (x-axis) increases (move right).

What happens visually when the price of a good changes (demand)?

There is movement along the demand curve; movement up or down

On a demand curve where does movement occur between?

What factors can cause movement along the demand curve?

The only factor that can create movement along the demand curve is price; all others cause the demand curve to shift right or left

CHANGE IN QUANTITY DEMANDED

A movement along the demand curve brought about by a change in price

What is on the y-axis of supply and demand curves?

What is on the x-axis of supply and demand curves?

When there is a change in quantity demanded what does not happen visually?

What does a demand curve assume?

What factors affect demand and consumer buying plans?

Many factors other than price:

1) Price of related goods

2) Income of consumers

3) Expected future prices

4)Overall population

5) Preferences

What will factors other than price cause with respect to demand?

What does a change in demand do to the demand curve?

Either will shift the entire demand curve to the right or to the left

demand schedule

a chart showing the price and quantity demanded at each price along with a graph

What are the categories of related goods that affect demand?

1) Substitutes

2) Complements

substitute

a good that can be used in place of another good or service; one of the "other goods" whose price affects demand

ex. a substitute for DVDs are videos

What type of a relationship is the relationship between price of a substitute and demand of a good?

Direct relationship

What happens if the price of a

substitute goes up?

Demand for the good will go up; demand curve shifts to the right

Since the substitute is now more expensive, people who would have bought the substitute now buy the good

What happens if the price of a substitute goes down?

Demand for the good will go down; shift of the demand curve to the left

Since the substitute is now cheaper, people would buy the substitute in place of the good

Complement

a good that is bought along with another good

ex. hotdogs and hotdog buns, pens and paper, computers and printers, DVDs and DVD players

What type of relationship exists between demand and price of a complement?

What happens if the price of a complement decreases?

What happens if the price of a complement increases?

What remains constant when there is a change in demand involving the five factors?

What happens when there is an increase in demand?

What does an increase in demand look like?

What does it look like when there is a decrease in demand?

What happens when there is a decrease in demand?

Entire demand curve shifts to the left from line A to line B

Price of the good remains constant; demand is simply decreased

What are the two kinds of goods with regard to the factor of income of consumers (demand)?

1) Normal goods

2) Inferior goods

NORMAL GOODS

goods that people will buy if they make enough money or not buy if they don't make enough money; if demand for a good goes up when consumer income goes up it is considered a normal good (most goods are normal goods)

What is the relationship between demand for normal goods and income of consumers?

Direct relationship

What happens to demand for a normal goods when overall consumer income goes up?

Demand for normal goods goes up (shifts the demand curve to the right)

because the more money consumers have, the more of these goods they will demand

What happens to the demand for normal goods when overall consumer income goes down?

Demand for normal goods goes down (shifts the demand curve to the left)

because as consumer income decreases people don't have as much mone available and are willing and able to buy less of goods

What kind of relationship exists between demand for inferior goods and income of consumers?

What happens to demand for inferior goods as overall consumer income goes up?

Demand for inferior goods goes down (shifts demand curve to the left) because people can afford and substitute better goods

What happens to the demand for inferior goods when overall consumer income goes down?

Demand for inferior goods goes up (shifts the demand curve to the right)

because people can afford to be less picky when they make less and purchase more inferior goods

inferior goods

goods that consumers will buy less of when they earn more money and more of when they earn less money

i.e. public transportation, cheap cars, clothes from Wal-Mart, Mac and Cheese

What relationship exists between demand and expected future prices?

What happens to the demand for a good right now if the price is expected to go up in the future?

Current demand will go up (shifts the demand curve to the right)

because consumers want to purchase goods at the best price

What happens to the demand for a good right now if the price of the good is expected to go down in the future?

Current demand goes down (shifts the demand curve to the left) 

because consumers want to get goods for the best price

What relationship exists between overall population and demand?

What happens to demand for goods when the overall population of an area increases?

Demand goes up (shifts the demand curve to the right)

Increase in population causes new demand because of additional people and new businesses open to meet this demand

What happens to demand for goods when the overall population of an area decreases?

Demand decreases (shifts the demand curve to the left)

Decrease in population causes less demand because there are less people and businesses are forced to close

What is true of preferences (regarding demand)?

Consumer preferences change; therefore, demand changes

How do Preferences differ from the other four factors that cause a change in demand?

Preferences

What is a main reason for a change in consumer preferences?

development of new technology: new technology renders many products obsolete causing them to disappear from the market due to a decrease in demand

Quantity demanded decreases if...

(movement up)

Price increases

Quantity demanded increases if...

(Movement down)

Price decreases

Demand increases if...

(shifts to the right)

Price of a substitute goes up

Price of a complement goes down

Consumer income goes down (inferior goods)

Consumer income goes up (normal goods)

Prices are expected to go up in the future

Overall population increases

Demand decreases if...

(shifts the demand curve to the left)

Price of a substitute goes down

Price of complement goes up

Consumer income goes up (inferior goods)

Consumer income goes down (normal goods)

The price is expected to go down in the future

Overall population goes down

New technology makes it obsolete

Let's Check Your Mastery

The main factor that causes a change in quantity demanded is ______.

Price

If the price of a good or service goes up or down there will be movement along the demand curve, which is a change in quantity demanded. A change in any other factor will cause a change in demand, or a shift in the demand curve.

Let's Check Your Mastery

What is the effect on the quantity of DVDs demanded if the price of videos increases?

It increases.

Quantity of DVDs demanded increases. Videos are a substitute for DVDs. If the price of videos goes up, more people are likely to buy DVDs instead of videos, so the quantity of DVDs demanded goes up.

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What is the effect on the quantity of DVDs demanded if the price of DVD players increases?

It decreases.

Quantity of DVDs demanded decreases. DVD players are a complement to DVDs. When the price of DVD players increases fewer people will buy DVD players, so fewer people will buy DVDs.

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What is the effect on the quantity of DVDs demanded if the overall consumer income increases?

It increases.

Quantity of DVDs demanded increases. Since DVDs are normal goods, when income increases, demand for DVDs increases.

Let's Check Your Mastery

The law of demand states that as the price of a good increases, the quantity demanded ______.

decreases

Quantity demanded varies inversely with price. When a price increases, consumers will demand less. When a price decreases, consumers will demand more.

Let's Check Your Mastery

In order to demand a good, a consumer must be both ____and _____ to buy the good.

willing and able

Definition of demand.

What do consumers want to take advantage of?

What do producers want to take advantage of?

high prices: want to produce good or service as cheaply as possible and sell it for as much as possible in order to make the most profit

What must be true in order for you to supply something?

quantity supplied

 the amount of a good or service that producers plan to sell during a given amount of time at a particular price; maximum amount that producers are willing to sell at a certain price

not necessarily quantity actually sold

 Why is the quantity supplied not necessarily the quantity actually sold?

Quantity actually sold depends on how much consumers buy

Simply represents the amount of goods offered for sale during a particular time, at a particular price

law of supply

a law that states, all other things remaining the same (5 factors), the higher the price, the larger the quantity supplied; quantity supplied varies directly with price

What is the relationship between price and quantity supplied?

What happens to quantity supplied if the price of a good increases?

If the price increases, the supply will increase (movement up). This is because as the price rises, producers are willing and able to offer more goods for sale.

Will increase supply because they can make more money per unit produced

What happens to the quantity supplied if the price of a good decreases?

If the price decreases, the quantity supplied will decrease (movement down). This is because as the price of a good is reduced, suppliers are less willing and able to supply that good.

Make less money per unit produced

What determines how many units of a good are produced?

marginal cost

Producers will continue to produce until what is true?

Marginal cost=price of the good (marginal benefit)

Cost of producing one more unit=benefit received from producing one more unit (money price)

Why do producers stop producing when marginal cost=price of the unit?

What is the profit-maximizing level of output for businesses?

What can cause marginal cost to become to high?

1) Price of raw materials (factors of production) may change

2) Requires too many employees to make another unit

What occurs at a zero price?

What does a supply curve look like?

What does a supply curve show?

The relationship between the quantity of a good supplied and its price; the quantity producers plan to sell at each price

In order for producers to be willing to produce x amount of a good, consumers must be willing to pay x amount of dollars per unit produced

Characteristic of a supply curve?

As the price (y-axis) increases, the quantity supplied (x-axis) increases (movement up)

As the price (y-axis) decreases, the quantity  supplied (x-axis) decreases (movement down)

What factors can cause movement along a supply curve?

What happens visually when there is a change in the price of a good (supply)?

change in quantity supplied

What factors affect production and production plans?

Factors other than price:

1) Price of the factors of production

2) Price of other goods produced

3) Expected future prices

4)Number of suppliers

5) Technology

What will a change in any of the five factors other than price do to supply?

What type of relationship exists between price of the factors of production and supply?

What happens to supply if the price of a factor of production increases?

If the price of a factor of production increases, supply will decrease (shifts the supply curve to the left)

If the price of a factor of production increases it will now cost more to produce one unit of the good (marginal cost)/ each good will cost more than it did before so supply will decrease

What happens to supply if the price of a factor of production decreases?

If the price of a factor of production decreases, supply will increase (shifts the supply curve to the right)

If the price of a factor of production decreases, producers spend less money per unit produced and the marginal cost of producing one more unit decreases so producers offer more goods for sale

change in supply

What does a change in supply look like visually?

What remains constant when there is a change in supply (shifting of the supply curve to the left or the right)?

What are the two types of "other goods" whose price affects the supply of a good?

1) Substitutes in production

2) Complements in production

Substitute in production

a good that can be produced instead of the good you are producing

ex. the same factory that produces cars can produce airplanes and the same factory that produces DVDs can produce CDs

What is the relationship between supply and price of a substitute in production?

What will happen to supply if the price of a substitute in production increases?

Supply of the good will decrease (shifts the supply curve to the left)

because the factory will stop making the current good and start making the substitute because they want to take advantage of the high price

What will happen to supply if the price of a substitute in production decreases?

Supply of the good will increase (supply curve shifts to the right)

Factories will stop making the substitute and will start making the good instead

complement in production 

a good that is produced along with another good

ex. beef and cowhide (leather) are produced together

What is the relationship between supply of a good and price of a complement in production?

What happens to supply of a good if the price of a complement in production increases?

Supply increases (shifts the supply curve to the right)

At the higher price producers will produce more of the complement and along with that comes more supply of the good

What happens to supply of a good if the price of a complement in production decreases?

Supply of the good decreases (shifts the supply curve to the left)

At the lower price producers produce less of the complement and along with that comes less of a supply of the good

Why can supply be influenced by the prices of other related goods (other than substitutes in production and complements in production)?

What type of relationship exists between expected future prices and supply?

What will happen to supply if the price of a good is expected to go up in the future?

Supply right now will go down (shifts the supply curve to the left)

because suppliers will decrease the amount they offer for sale and wait and offer more for sale when the price increases

What will happen to the supply of a good if the price is expected to go down in the future?

Supply right now will increase (shifts the supply curve to the right)

because producers want to sell as much as they can at the current price because when the price goes down they won't make as much money

What type of relationship exists between number of suppliers and supply?

What happens to supply if the number of suppliers increases?

What happens to supply if the number of suppliers decreases?

Supply decreases (shifts the supply curve to the left)

How does technology affect supply?

What are producers motivated to do with respect to technology?

Motivated to develop new technolgy because of profit

Of the 5 factors which can be said to have the greatest impact on supply?

Because of new technology what is it up to producers to do?

What else does new technology help producers do?

Market and distribute goods more efficiently: can advertise to a larger population and are therefore able to sell more products

Quantity supplied increases if...

(movement up)

Price increases

Quantity supplied decreases if...

(movement down)

Price decreases

Supply increases if...

(curve shifts to the right)

Price of a factor of production decreases
Price of a substitute in production decreases

Price of a complement in production increases

Prices are expected to go down in the future

Number of suppliers increases

New and improved technology produces goods faster and cheaper (more efficiently)

Supply decreases if...

(shifts the supply curve to the left)

Price of a factor of production increases

Price of a substitute in production goes up

Price of a complement goes down

Prices are expected to go up in the future

Number of suppliers decreases

Let's Check Your Mastery

A rise in the price of chicken feed shifts the supply curve of chickens leftward.

(a) true

(b) false

(a) true

Chicken feed is a factor of production when producing chickens. If the price of a factor of production goes up, that shifts the supply curve to the left. Chickens are now more expensive to produce, and there are fewer chickens being produced.

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The law of supply states that as the price of a good rises, the quantity supplied decreases.

(a) true

(b) false

(b) false

As the price of a good rises, the quantity supplied increases. Suppliers produce more, because they have the potential of making more money.

Let's Check Your Mastery

A rise in the price of a good will shift its supply curve to the right.

(a) true

(b) false

(b) false

Any change in the price of a good will produce movement along the supply curve. A shift in the supply curve occurs when a factor other than price is changed.

Let's Check Your Mastery

Marginal cost is the cost of producing one more unit of output.

(a) true

(b) false

(a) true

Suppliers continue to produce until the marginal cost exceeds the marginal benefit they receive from the last unit produced.

What happens to quantity supplied and quantity demanded as price of a good increases?

Quantity demanded decreases: at higher prices consumers want less of the good

Quantity supplied increases: at the higher price producers stand to make more money so they produce more

Why can't producers or consumers set prices? What would happen if they did?

If producers set prices:

-prices would be very expensive because they want to make as much money as possible

-at the high prices they would supply a lot of goods (high supply) but consumers wouldn't buy them (low demand) so they would end up with extra goods

If consumers set prices:

-prices would be fairly cheap

-at the low prices consumers would demand a lot of the goods (high demand) but not many producers would be willing to produce them (low supply)

What determines price in a market economy?

Supply and Demand

-Scarcity (supply)

-Utility (demand)

-Cost of production (supply)

Who do prices in a market economy favor? Consumers or producers?

How are prices in a market economy determined? What process

Determined by the market seeking to stay in equilibrium, balanced, supply=demand

Producers and consumers compete to determine prices and in a stable market economy that price is always the equilibrium price

Equilibrium

Equilibrium point

At the equilibrium point what is there?

1) Equilibrium price

2) Equilibrium quantity

Equilibrium price

Equilibrium quantity

What does a graph of supply and demand look like?

What is true of an equilibrium price from the perspective of consumers and producers?

Price satisfies both producers and consumers:

Consumers is able to get goods at an adequate (middle-ground) price

Producers are able to sell goods for and adequate (middle-ground) price

In a stable market economy what is true of the price of goods?

What does a graph of a shortage of goods look like?

[image]

-Points A and B will be below the equilibrium point if there is a shortage

Shortage

When does a shortage usually occur?

When the price is set below the equilibrium price/ too low:

At the low price consumers are willing to buy more than available (higher demand)

At the low price producers are willing to produce less than needed (lower supply)

How is a shortage of x goods found?

What happens to price when there is a shortage?

Price is forced up

A shortage means goods are scarce and scarcity increases value and the price is forced to increase:

1) Consumers who can't find the good offer to pay a higher price for them

2) Producers notice that there are people who are willing and able to pay a higher price for the good

3) Wanting to make more of a profit, producers begin offering more for sale at a higher price (decreasing shortage)

4) Over time the price is forced up to the equilibrium price

What does a graph of a surplus look like?

[image]

Points A and B will be above the equilibrium point if there is a surplus

Surplus

When does a surplus of goods usually occur?

When the price is set above the equilibrium pointl set too high:

At the higher price producers, wanting to make more money, produce too many goods (high supply)

At the higher price consumers demand less goods (low demand)

How can surplus be calculated?

What happens to the price of a good if there is a surplus?

It is forced down.

Powerful forces in the economy work to force the price down to equilibrium:

1) Some producers cut prices to sell extra quantities

2) Producers cut back on production to decrease their surplus

3) Eventually the price is forced down to the equilibrium price

What is the relationship between a change in demand and price?

What happens to equilibrium price when demand increases (shift to the right)?

The price will increase because as demand increases the good becomes more scarce and is worth more

Since the price is currently lower than the new equilibrium price there is a shortage of goods

Shortage of goods will force the price up to the new equilibrium point

What happens to equilibrium price when demand decreases (shift to the left)?

Price decreases because the good becomes less scarce:

Since the price is currently higher than the equilibrium price there is a surplus of goods

Surplus of goods will force the price down to the new equilibrium price

What does the graph look like for a change in demand affects price?

What happens visually when there is an increase in demand?

Demand curve shifts to the right and establishes a new equilibrium point where it meets the supply curve

What happens visually if there is a decrease in demand?

The demand curve shifts to the left and a new equilibrium price is established where the new demand curve meets the supply curve

What remains constant on a graph of a change in demand affecting equilibrium price?

What relationship exists between supply and equilibrium price?

What happens to equilibrium price when there is an increase in supply (shifts to the right)?

Price decreases because the good is less scarce

Since the price is currently higher than the new equilibrium price there is a surplus of goods

Surplus forces the price down to the new equilibrium price

What happens to equilibrium price if supply decreases (shifts to the left)?

Price increases because the good becomes more scarce

Since the price is currently lower than the new equilibrium price there is a shortage of goods

Shortage forces the price up to the new equilibrium price

What does a graph of a change in supply affecting price look like?

What happens visually if there is a increase in supply affecting equilibrium price?

What happens visually if there is a decrease in supply affecting equilibrium price?

What remains constant on a graph of a change in supply affecting equilibrium price?

What can prevent markets from reaching equilibrium?

What are the kinds of goverment regulations or price controls that impact equilibrium?

1) Price floors

2) Price ceilings

Price floor

the lowest legal price that can be paid for a good or service; a barrier set by the government so that the price cannot go below that point

ex. minimum wage: the wage set by the governement that employers have to pay (it is  illegal to pay a worker less than this)

In order for a price floor to affect the economy what must be true?

It must be set above the equilibrium price so equilibrium can never be reached

because if a price floor is set below the equilibrium price it will still allow equilibrium to be reached

What does a graph of the effect of a price floor look like?

[image]

Looks like surplus graph

What happens when price floors are set above the equilibrium price?

Equilibrium can never be reached, market stays unbalanced

Consumers pay more than equilibrium price for goods

At the higher price there is a surplus of goods (producers produce more, consumers consume less)

Usually price would be forced down but because of price floor it can't go any lower

What are the positive and negative effects of minimum wage?

Positive: Ensures workers are paid and adequate amount for their work

Negative: creates a higher unemployment rate

Price ceiling

a government regulation or price control that sets the maximum legal price that can be charged for a product; barrier set by the government so that price cannot go above this point

ex. housing prices in New York City

In order for a price ceiling to affect the economy what must be true?

Must be set below the equilibrium price so it can never reach equilibrium

because if a price ceiling is set above the equilibrium price equilibrium can still be reached

What does a graph showing the effect of a price ceiling set below equilibrium price look like?

[image]

Looks like a graph for a shortage

What does a price ceiling set below equilibrium price do?

Equilibrium can never be reached, market remains unbalanced

Consumers pay less than the equilibrium price for a good

Since the price is lower than equilibrium price a shortage is created (at the lower price consumers demand more and producers produce less/ offer a limited amount for sale)

Price would usually be forced up to the equilibrium price but the price ceiling prevents this

What are the positive and negative effects of a price ceiling set on rent in New York City?

Positive: makes adequate housing more affordable for everyone

Negative: Produces a waiting list of people who demand housing

What is an example of other price controls?

Let's Check Your Mastery

Once a market is at its equilibrium price, unless something changes the ____ and ______ will not change.

quantity (quantity demanded and quantity supplied) and price

Once at equilibrium, the price and quantity will not change unless there is a shift in the supply or demand curve.

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If there is surplus of goods, its price will ______.

be forced down

A surplus means that there is more supplied than demanded. Everyone who demands the good is able to buy it, and suppliers either cut prices or reduce supply.

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If there is a shortage of a good, its price will_____.

be forced up, increases

A shortage means that there is more demanded than supplied. This means there are many people demanding a good who cannot acquire it. Suppliers notice this and raise prices. Consumers may be willing to pay more for the good, which drives prices up.

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Equilibrium is defined as _______.

a state of balance between opposing forces or powers

Definition of equilibrium. Supply and demand work together to determine a price where the market is balanced.

Let's Check Your Mastery

The market for chickens is initially in equilibrium. Suppose that eating buffalo wings (which are made from chickens) becomes very popular  and people begin eating them for breakfast, lunch, and dinner. Use a supply and demand diagram to determine how the equilibrium price and quantity change.

[image]

The demand curve will shift to the right due to a change in people's preferences for buffalo wings. This will increase the quantity demanded, and increase the equilibrium price.