Transcript CA_3_Market Economy PowerPoint

Capitalism:
A Market Economy
Written by Ashley Hopkins and Frank Flanders, Ed.D.
Resource Network 2010
Objectives
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Students will be able to answer the three
economic questions in regards to a market
economy.
Student will be able to explain supply and
demand.
Students will be able to identify the difference
between an equilibrium, shortage, and surplus.
Students will be able to explain the difference
between elastic and inelastic.
Market Economy Review
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Also known as
capitalism
All resources are
privately owned
Any income derived
from selling resources
goes exclusively to
each resource owner
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Economic activity is
based on the prices
generated in free,
competitive markets
Supply and demand
is the driving force in
market economies
Capitalism vs. Market Economy
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Capitalism and a market economy are
terms that are used inter-changeably to
describe an economy that is driven by the
consumer.
Do You Remember the 3 Economic
Questions?
What goods and services should be
produced?
 How should the goods and services be
produced?
 For whom should the goods and
services be produced?
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What goods and services should
be produced?
In a market economy…
Consumers decide what should be
produced in a market economy through the
purchase that they make in the marketplace.
 If the products does not satisfy consumers’
needs or wants, the goods are not
purchased; therefore, producers will not
achieve success.
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How should the goods and services
be produced?
In a market economy…
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Businesses in a market economy decide how to
produce goods and services.
Businesses must be competitive and produce
quality products at low prices.
It is necessary for businesses to find the most
efficient way to produce their goods and the best
way to encourage customers to purchase their
products.
For whom should the goods and
services be produced?
In a market economy…
 People
who have money!
 In a market economy,
businesses produce
products for people who
want their products and
are able or willing to pay
for them.
What is Supply and Demand?
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In a market economy, supply and demand
determine the prices and quantities of
goods and services produced.
Supply
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Is the amount of goods
producers are willing to
make and sell.
The law of supply is the
economic rule that price
and quantity move in the
same direction.
In other words, the more
of a product is on the
market, the lower the
price.
S1
Price
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Quantity
S2
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Refers to the consumer's
willingness and ability to
buy products.
The law of demand is the
economic principle that
price and demand move in
opposite directions.
In other words, the more
people who want
something, the higher the
price.
Price
Demand
D2
D1
Quantity
Supply and Demand
Supply: If the price goes up, the quantity
produced goes up.
 Demand: If the price of a good increases,
the quantity of the good demanded falls.
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Surplus
Surpluses of goods occur when supply
exceeds demand.
 If the price of a product is too high or
seems unreasonable to customers, they
may decide not to buy it. Thus, supply will
exceed demand.
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Shortage
When demand exceeds supply, shortages
of products occur.
 When shortages occur, businesses are
able to raise their prices of the product and
still sell their merchandise.
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Equilibrium
When the amount of a product being
supplied is equal to the amount being
demanded, equilibrium exist.
 When supply equals demand, everyone
wins!
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Price
Supply and Demand Equilibrium
Quantity
Elastic vs. Inelastic
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Elastic: refers to a situation in which change in
price creates a change in demand.
 Example:
Changes in the price of steak. If the price
were $8 a pound, few people would buy steak. If the
price were to drop to $5, $3, or $2, demand would
increase at each price level.
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Inelastic: Refers to a situation in which a
change in price has very little effect on the
demand for the product.
 Example:
During the holiday season, parents are
more inclined to pay more for a popular toy for their
children then they would normally pay.
Review
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How does a market economy answer the three
economic questions?
 What?
 How?
 For
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whom?
What is supply and demand?
 Supply
is the amount of goods producers are willing
to sell
 Demand is the amount of goods consumers are will
to buy.
Review Con’t…
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Explain the three supply and demand
conditions. Which is the desired condition?
 Surplus
 Shortage
 Equilibrium
What is the difference between elastic and
inelastic?