the circular flow of economic activity a healthy market depends on a flow of resources, goods, and...
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The Circular Flow of Economic Activity
• A healthy market depends on a flow of resources, goods, and services
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Expanding the Circular Flow
• You are involved in exchanges with multiple businesses!
• Producers (business owners) need not just labor, but land and raw materials– Also tools, machines
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I. The Circular Flow of Economic Activity
• A healthy market depends on a flow of resources, goods, and services
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• You are involved in exchanges with multiple businesses!
• Producers (business owners) need not just labor, but land and raw materials– Also tools, machines
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III. Supply and Demand
• Producers (buisness) and Individuals (buyers) act both as buyers and sellers
• Both are involved in exchanging goods and services
• In a Free Enterprise the Market Determines:– How much is being produced– The cost of a good or service
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III. Supply and Demand Cont.
• When there is competition, the market works according to the laws of supply and demand– What happens when people make choices!
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–What determines the price of pizza, gasoline, a car wash, or other goods and services?
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IV. The Law of Demand?
• tells us the quantity of a good that buyers wish to buy at each price
• As price of a good or service goes down the quantity consumers wish to buy will increase– Therefore, the demand curve is downward-
sloping
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The Daily DemandCurve for Pizza in Chicago
Price($ per slice)
Quantity(1000s of slices per day)
4
8
2
16
3
12
Demand
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Why do buyers purchase a greater quantity at lower prices and vice-versa?
1. The substitution effect
2. The income effect
3. Law of Diminishing Marginal Utility (extra satisfaction)
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V. Buyers and Sellers In Markets
1. The Substitution Effect– The change in the quantity demanded of a
good that results because buyers switch to substitutes when the price of the good changes
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2. The Income Effect– The change in the quantity demanded of a
good that results because a change in the price of a good changes the buyer’s purchasing power
V. Buyers and Sellers In Markets
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3. Diminishing Marginal Utility– The change in the quantity demanded of a
good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed
V. Buyers and Sellers In Markets
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Will the opportunity cost of producing additional units of pizza increase or decrease?
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VI. Balancing Cost and Benefits
• A producer’s cost is determined by how much it costs to produce an item
• The price a buyer pays for each item = the benefit for the producer– The higher the price the better for the
producer!
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The Daily DemandCurve for Pizza in Chicago
Price($ per slice)
Quantity(1000s of slices per day)
4
8
2
16
3
12
Demand
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VII. The Law of Supply
• the quantity of a good that sellers wish to sell at each price
• As price of a good or service goes up the quantity producers wish to produce will increase
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The Daily SupplyCurve for Pizza in Chicago
Price($ per slice)
Quantity(1000s of slices per day)
4
2
3
8 12 16
Supply
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VIII. Market Price• The Price at which buyers and sellers
agree to trade
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IX. WHAT SHIFTS DEMAND?• Two kinds of changes
1. Movement along the demand curve• Change in “Quantity demanded”
2. Shift in the whole demand curve• What shifts the whole Demand Curve?
– Changes in……..• Income• Taste• Expectations• The market’s size• The price of related goods and services
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IX. WHAT SHIFTS DEMAND?• Shift along the Demand curve
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IX. WHAT SHIFTS DEMAND?• Movement of the WHOLE DEMAND curve
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X. WHAT SHIFTS SUPPLY?• Two kinds of changes
1. Movement along the Supply curve• Change in “Quantity demanded”
2. Shift in the whole Supply curve• What shifts the whole Demand Curve?
– Changes in……..• Technology• Input prices• Expectations• The number of producers• The price of related goods and services
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X. WHAT SHIFTS SUPPLY?• Shift along the supply curve
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X. WHAT SHIFTS SUPPLY?• Movement of the whole supply curve