Transcript Goal 8.05 Predict how prices change when there is either a shortage

Unit 7 Predict how prices change when
there is either a shortage or surplus
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In a market economy, what is the basis for
making economic decisions.
Surplus: amount by which quantity supplied is
higher than the quantity demanded.
Shortage: amount by which quantity
demanded is higher than the quantity supply
Equilibrium price assures no surplus or
shortage
I: Price Controls
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Sometimes the government set the price of a
product because it thinks that the forces of supply
and demand are unfair.
Can favor either consumer or producer
Price Ceiling: maximum price set by the
government that can be charges for goods and
services
Price Floor: government minimum price that can be
charged.
Price Floors are more common than price ceiling.
Ex. Minimum wage (lowest legal wage for workers)
What can you assume, if, over time, a product surplus
does not force down prices?
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If the price of a product is above its
equilibrium price, what is the result?
Prices are signals that help businesses and
consumers make decisions.
So, what do prices tell us?
In a free market, prices are neutral, flexible,
offer choice, and are familiar.
Unit 7B: What are Free Markets?
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In a Free Market economy prices are flexible,
offer choice, are neutral, and are familiar.
Consumer sovereignty drives supply and
demand. Supply and demand establish prices.
Prices are signals that help businesses and
consumers make decisions.
The Government plays a role as regulator and
mediator to prevent corruption and abuse in the
marketplace. This means our market is a MIXED
Market Economy.
The relationship between govt, businesses, and
consumers is called the Circular Flow.
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The Circular Flow Model
The American free enterprise (capitalist) system is a wonder of wonders. Just how do we ensure that all of our
citizens needs are provided for? How do we make sure that we produce what we need and that those goods are
allocated fairly (distribution). Of course I am referring to the three basic economic questions. So, just how do we
ensure they are being answered properly. Well, the reality is, we don't!
In America, and in all basically capitalist systems we rely on a rather complex theoretical model to tell us this
whole free enterprise thing works. This model is called the Circular Flow Model. What the circular flow model
tells us is that three basic elements of the economy will work and interact together to ensure that our needs and
wants are provided for.
There are three basic elements, or what are referred to as sectors, of the economy that must interact.
These sectors are:
Consumer
Business
Government
Circular flow basically shows us that input from each sector and to each sector spurs on production and thus
goods and services are created. Here is a graphical representation of circular flow:
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As you can see, each sector of the economy feeds another. Households (consumers) provide businesses with
payments in exchange for jobs and goods and services. Government provides consumers and businesses with
payments in exchange for goods and services from business and taxes and resources from consumers. It is what
is called a symbiotic relationship. We all rely upon one another.
Is the circular flow model complete? No, nor is it meant to be. It is merely a theory that explains how free
enterprise works. Banks for example, a very important part of the economy, are left out.
Some societies do not accept the circular flow model theory. These societies, therefore, choose another economic
system other than capitalism. Socialists and communists see the role of the government in a different light than
capitalists do. They see a government that must in some cases should provide for all needs (command) and in
other cases provide for some needs (socialist). They do not trust that this will all just work out the way the theory
says it will.
Does circular flow work? The answer is yes and no. Yes, in that we are a wealthy, productive society. No, in that
there are some citizens who fall through the cracks and do not have their needs met. We try to help them and thus
move closer to socialism and increase the role of government. This is why we are really a mixed economy and not
a pure capitalist economy.
Government and Business make up
the American Economy.
How does the circular flow work?
Globalization and Domestic Circular
Flow together.
Unit 7 Explain how changes in the level of
competition can affect price and output
levels.
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GDP-Gross Domestic Product =is the total
value in dollars of all the final goods and
services produced in a country in one year.
GDP is measured only by new goods not
used goods.
Durable Goods=Products with life is more than 3 years
(ovens, washing machines, cars, furniture)
Semi-Durable Goods=Products with short life spans(
clothes, shoes, pencils)
II: Measuring GDP
GDP is calculated by adding up the value of all final goods and
services produced in country in a single year.
 GDP is used by to analyze how the economy is doing.
 Important indicator of the standard of living in a country (
luxuries and necessities that make life better and easier)
 Weakness of GDP is that it does not measure overall society well
being.
 NDP= Net Domestic Product: loss of value due to wear and
tear. Depreciation of durable goods and capital goods. NDP
takes GDP and subtracts cost of depreciation.
 Gross National Product vs. Gross Domestic Product
GNP is GDP plus investment, earnings and foreign investment
by US citizens.
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I: Market Basics
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A:Market: Place where goods and services are
bought and sold
Market price: the price paid by the buyer and accepted
by the seller
Perfect competition: a market with a large number of
firms all producing the same product at the same price.
B: Monopoly: a firm is the only producer of a
product and there is not a close substitute.
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1. Govt. regulated or natural monopolies Ex: public utilities; gas
companies, electric companies.
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C: Oligopoly: few firms dominate the market
and the products offered are substitutes, if
not identical. Examples: soft drink companies, airline
industry, oil companies.
II: Mergers
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A: when two or more firms join to make one
bigger firm, they merge. These mergers or
business combination occur in three ways.
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1. Horizontal merger join two or more firms that
produce the same product. Ex: Exxon and Mobil
Oil, AT&T and Sprint,
2. Vertical Merger a business at a different level
or stage of the product delivery process buys
another firm. Ex: A grocery chain buys a dairy.
The firm then produces and sells the milk. Or a
car manufacturer buys a tire company.
Cont.
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3. Conglomerate forms when companies in
unrelated businesses join together. General
Electric is an example
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A multinational conglomerate is a firm that
operates in more than one country and unrelated
businesses merge. Ex: Walt Disney, NewsCorp,
General Electric, Bayer, Nokia.