the principles of our market economy
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The Principles of Our Market Economy. I. The Circular Flow of Economic Activity. What is the Circular Flow of Economic Activity?. A healthy market depends on a flow of resources, goods, and services. II. Expanding the Circular Flow. How is the Cicular Flow Expanded?. - PowerPoint PPT PresentationTRANSCRIPT
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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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II. 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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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?
•The substitution effect•The income effect•Law of Diminishing Marginal Utility (extra satisfaction)
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V. Buyers and Sellers In Markets
• 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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• 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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• 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!
![Page 15: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/15.jpg)
The Daily DemandCurve for Pizza in Chicago
Price($ per slice)
Quantity(1000s of slices per day)
4
8
2
16
3
12
Demand
![Page 16: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/16.jpg)
Why do buyers purchase a greater quantity at lower prices and vice-versa?
•The substitution effect•The income effect•Law of Diminishing Marginal Utility (extra satisfaction)
![Page 17: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/17.jpg)
VII. Buyers and Sellers In Markets
• 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
![Page 18: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/18.jpg)
• 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
VII. Buyers and Sellers In Markets
![Page 19: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/19.jpg)
• 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.
VII. Buyers and Sellers In Markets
![Page 20: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/20.jpg)
Will the opportunity cost of producing additional units of pizza increase or decrease?
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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!
![Page 22: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/22.jpg)
The Law of Supply
• the quantity of a good that sellers wish to sell at each price
![Page 23: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/23.jpg)
The Daily SupplyCurve for Pizza in Chicago
Price($ per slice)
Quantity(1000s of slices per day)
4
2
3
8 12 16
Supply
![Page 24: The Principles of Our Market Economy](https://reader035.vdocuments.us/reader035/viewer/2022062222/56815e4e550346895dccc540/html5/thumbnails/24.jpg)
Market Price• The Price at which buyers and sellers
agree to trade
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Buyers and Sellers In Markets
• 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.