economics eoct prep
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Economics EOCT Prep. Microeconomics. Markets. In a Market Economy, SUPPLY and DEMAND provide signals that trigger production and consumption of goods and services WE, as consumers , are the demanders WE, as producers , are also the suppliers. Circular Flow of Economic Activity. - PowerPoint PPT PresentationTRANSCRIPT
Economics EOCT PrepMicroeconomics
Markets•In a Market Economy, SUPPLY and
DEMAND provide signals that trigger production and consumption of goods and services
•WE, as consumers, are the demanders•WE, as producers, are also the suppliers
Circular Flow of Economic Activity
What is DEMAND?•The willingness and ability to purchase
a good or service•The Law of Demand states:
▫Consumers will buy MORE of a good or service when its PRICE DECREASES
▫Consumers will buy LESS of a good or service when its PRICE INCREASES
(DUH!!! – Right???)
Imagine a product…Let’s say SODA (from the school drink machine)How many would you buy a week if they cost:
$1.00 ?$1.50 ?$2.00 ?$3.00 ?$ .50 ?
Demand SchedulePRICE
of a SodaQuantity of Soda
DEMANDED$ .50 10$1.00 5$1.50 4$2.00 2$3.00 1
Demand Curve
0 2 4 6 8 10 12$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
QUANTITY
PRIC
E
What might cause Demand to Shift?•INCOME – as income increases, consumers
purchase more (exception = inferior goods!)•CONSUMER EXPECTATIONS – if we
expect the price of a good to change in the future, it impacts our current demand for the good (example = gas)
•POPULATION – changes in the number of people impact demand for goods/services
•CONSUMER TASTES & ADVERTISING – influences trends so demand is impacted
Also…•Changes in the PRICE of RELATED
GOODS▫Complements are two goods that are
typically bought and used together (example = skis and ski boots)
▫Substitutes are goods used in place of one another (example = skis and snowboards)
What is ELASTICITY of DEMAND?•Elasticity of Demand is a measure of how
consumers react to a change in the PRICE of a good/service (how flexible they are)▫Demand for a good that consumers NEED
tends to be INELASTIC (not flexible)▫Demand for a good that consumers can do
without (perhaps there are substitutes) tends to be ELASTIC (flexible)
Reviewing DEMAND1. The law of demand states that
a. Consumers will buy more when a price increases
b. Price will not influence demandc. Consumers will buy less when a price
decreasesd. Consumers will buy more when a price
decreases
2. If the price of a good rises and income stays the same, what is the effect on demand?
a. The prices of other goods dropb. Fewer goods are boughtc. More goods are boughtd. Demand stays the same
3. Which of the following statements is accurate?a. When two goods are complementary, increased
demand for one will cause decreased demand for the other.
b. When two goods are complementary, increased demand for one will cause increased demand for the other.
c. If two goods are substitutes, increased demand for one will cause increased demand for the other.
d. A drop in the price of one good will cause increased demand for its substitute.
4. What does elasticity of demand measure?
a. An increase in the quantity availableb. A decrease in the quantity demandedc. How much buyers will cut back or
increase their demand when prices rise or fall
d. The amount of time consumers need to change their demand for a good
5. What effect does the availability of many substitute goods have on the elasticity of demand for a good?
a. Demand is elasticb. Demand is inelasticc. Demand is unitary elasticd. The availability of substitutes does not
have an effect
What is SUPPLY?•According to the Law of Supply,
suppliers will offer MORE of a good at a HIGHER PRICE.
Price As price
increases…
SupplyQuantity supplied increases Price
As price falls…
SupplyQuantity supplied
falls
Supply Schedule
Supply CurveRemember:If you are a PRODUCER, higher prices (as long as production costs remain constant) mean you make a bigger PROFIT!
What is ELASTICITY of SUPPLY?•Elasticity of Supply is a measure of the
way QUANTITY SUPPLIED reacts to a CHANGE in PRICE.▫If supply is not very responsive to changes
in price (perhaps it takes a long time to make the good), it is considered INELASTIC.
▫An ELASTIC supply is very sensitive to changes in price (the supply can be increased or decreased fairly easily).
How do businesses determine how many people to hire?
•They must know how the number of workers affects total production
•The marginal product of labor is the change in output from hiring one additional worker
Marginal Returns
Changes in Supply•Any change in the COST of an input (like
raw materials, machinery, or labor) will affect supply.
•New technology can decrease costs and increase supply.
Reviewing SUPPLY:1. What is the law of supply?
a. The lower the price, the larger the quantity supplied
b. The higher the price, the larger the quantity supplied
c. The higher the price, the smaller the quantity supplied
d. The lower the price, the more manufacturers will produce the good
2. What happens when the price of a good with elastic supply goes down?
a. Existing producers will expand and some new producers will enter the market
b. Some producers will produce less and others will drop out of the market
c. Existing firms will continue their usual output but will earn less
d. New firms will enter the market as older ones drop out
3. What are diminishing marginal returns of labor?
a. Some workers increase output but others have the opposite effect
b. Additional workers increase total output but at a decreasing rate
c. Only a few workers will have to wait their turn to be productive
d. Additional workers will be more productive
4. What affect does a rise in the cost of raw materials have on the cost of a good?
a. It lowers the overall cost of productionb. The good becomes cheaper to producec. The good becomes more expensive to
produced. This does not have any affect on the
eventual price of a good
Combining Demand and Supply•The point at which quantity demanded
and quantity supplied come together is known as equilibrium
Interactions between buyers and sellers will always push the market back toward
EQUILIBRIUM.
Price Ceilings•In some cases, the government steps in to
control prices. ▫A PRICE CEILING is a maximum price
that can be legally charged for a good▫An example is rent control, a situation
where the government sets a maximum amount that can be charged for rent in an area
Price ceilings create excess DEMAND.
The difference between the artificial price and the equilibrium price is a SHORTAGE.
Price Floors•A PRICE FLOOR is a minimum price,
set by the government, that must be paid for a good or service.
•An example is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.
Price floors create excess
SUPPLY.
The difference between the
artificial price and the
equilibrium price is a
SURPLUS.
The Role of Prices•Prices provide a language for buyers
(consumers/demanders) and sellers (producers/suppliers)▫They act as an INCENTIVES – help
indicate relative scarcity ▫They act as SIGNALS – like a traffic light▫They are more FLEXIBLE than production
Reviewing D x S:1. Equilibrium in a market is the point at
whicha. Quantity supplied and quantity demanded
are the sameb. Unsold goods begin to pile upc. Suppliers begin to reduce pricesd. Prices fall below the cost of production
2. What happens when any market is in disequilibrium and prices are flexible?
a. Market forces push toward equilibriumb. Sellers waste their resourcesc. Excess demand is createdd. Unsold perishable goods are thrown out
3. What prompts efficient resource allocation in a well-functioning market system?
a. Businesses working to earn a profitb. Government regulationc. The need for fair allocation of resourcesd. The need to buy goods regardless of price
MARKET STRUCTURES•These are ways production of goods and
services in particular markets are organized (they mainly differ in terms of the # of firms in the market)▫Perfect Competition▫Monopolistic Competition▫Oligopoly▫Monopoly
Perfect Competition•A market structure in which a LARGE
NUMBER of firms all produce the SAME product – this type of structure tends to be most efficient▫Many buyers and sellers▫Identical products▫Informed buyers and sellers▫Free market entry and exit
BARRIERS to ENTRY•These are factors that make it difficult for
new firms to enter a market▫START-UP COSTS – the $ a business must
pay before the product reaches customers▫TECHNOLOGY – some markets require a
high degree of technological sophistication (knowledge that inhibits entrepreneurs from entering the market)
Monopolistic Competition•A market structure in which MANY
companies compete to sell products which are SIMILAR but not identical.▫Many firms▫Few barriers to entry▫Slight control over price▫Differentiated product
Monopolistically Competitive Companies often use NON-PRICE Competition to attract customers:
•Characteristics of the product – size, color, shape, taste, etc.
•Location of the sale – busy corner versus isolated
•Level of service – better customer service•Advertising image – to create apparent
differences; use of celebrities or fads
Oligopoly•A market structure dominated by a FEW,
LARGE, PROFITABLE firms.▫Collusion may occur – when companies
work together to set prices and production levels Price-fixing – like Coke and Pepsi
▫Cartels may be established – producers formally coordinate prices and production
Monopoly•A market dominated by a SINGLE seller of a
product or service▫Monopolies form when barriers prevent firms
from entering the market with a single supplier Start-up costs are high
▫They can take advantage of their power and charge higher prices
▫Natural Monopolies – like power and water; we allow these because they are more efficient
▫New technology can destroy the power of a monopoly
Government and Competition•Government policies keep firms from
controlling the prices and supply of important goods.
•Antitrust laws encourage competition in the marketplace.▫Regulates business practices▫Breaks up monopolies▫Blocks mergers▫Preserves incentives
Comparison of Market Structures:
Reviewing Market Structures:1. Which is NOT a condition for Perfect
Competition?a. Many buyers and sellers participateb. Identical products are offeredc. Market barriers are highd. Buyers and sellers are well-informed
about goods and services
2. A monopoly isa. A market dominated by a single sellerb. A license that gives the inventor of a new
product the exclusive right to sell it for a certain amount of time
c. An industry that runs best when one firm produces all the output
d. An industry where the government provides all the output
3. An oligopoly isa. An agreement among firms to charge one
price for the same goodb. A formal organization of producers that
agree to coordinate price and outputc. A way to attract customers without
lowering the priced. A market structure in which a few large
firms dominate a market
4. The purpose of both deregulation and antitrust laws is to
a. Promote competitionb. Promote government controlc. Promote inefficient commerced. Prevent monopolies
BUSINESS ORGANIZATIONS•Businesses can be owned by individuals,
families, or large groups of people.▫Sole Proprietorship▫Partnership▫Corporation▫Franchise
Sole Proprietorship•A business owned and managed by a
single individual•The most common form of business
organization•Most are small•Few earn large profits
Advantages of Sole Proprietorships:•Easy to start up•Relatively few regulations•Sole receiver of profits•Full control•Easy to discontinue
Disadvantages of Sole Proprietorships:•Limited access to resources like
physical capital•Lack permanence•Unlimited liability – legal obligation for
ALL debts related to a business
Partnership•A business organization owned by two or
more people who agree on division of responsibilities▫General partnerships – partners share
equally▫Limited partnerships – only one partner
has unlimited liability▫Limited liability partnerships – all
partners are limited
Advantages of Partnerships:•Easy to start up•Shared decision making and
specialization•Larger pool of capital•Limited taxation
Disadvantages of Partnerships:•Typically at least one partner has
unlimited liability•Potential for conflict
Corporation•A legal entity owned by individual
stockholders•Stocks (shares) represent a stockholder’s
portion of ownership of a corporation•Can be closely or publicly held
Advantages of Incorporation:•Individual investors don’t carry
responsibility for corporate actions•Shares of stock are transferable•Potential for more growth than others•Can borrow money by selling bonds•Have longer lives
Disadvantages of Incorporation:•Difficulty and expense of start-up•Double taxation – on income and
dividends•Loss of control•More regulation
Franchise•A semi-independent business that pays
fees to a parent company in return for the exclusive right to sell a certain product or service in a given area▫Individual McDonald’s restaurants▫American Eagle store at the Mall of
Georgia
Franchise Advantages/Disadvantages•Management
training and support•Standardized quality•National advertising
programs•Financial assistance•Centralized buying
power
•High franchising fees and royalties
•Strict operating standards
•Purchasing restrictions
•Limited product line
Reviewing Business Organizations:1. Any establishment formed to carry on
commercial enterprises is a a. Partnershipb. Business organizationc. Sole proprietorshipd. Corporation
2. Sole proprietorshipsa. Are complicated to establishb. Make up about 50% of all businessesc. Are the most common form of business in
the U.S.d. Offer owners little control over operations
3. What advantage does a partnership have over a sole proprietorship?
a. The responsibility for the business is shared
b. The business is easy to start upc. The partners are not responsible for the
business debtsd. The business is easy to sell
4. All of the following are advantages of incorporation EXCEPT
a. The responsibility for the business is shared
b. Capital is easier to raise than in other business forms
c. Corporations face double taxationd. Corporations have more potential for
growth
5. A business franchisea. Attempts to improve the image and
working conditions of people in a particular occupation
b. Operates without the aim of profitc. Is a semi-independent business tied to a
parent companyd. Is not required to pay income taxes