Today’s Warm UpToday’s Warm Up

Due to scarcity, resources are limited. We Due to scarcity, resources are limited. We can’t all have whatever we want, whenever we can’t all have whatever we want, whenever we want. How does a country like the U.S. decide want. How does a country like the U.S. decide who is going to get what?who is going to get what?

AP Microeconomics CurriculumAP Microeconomics CurriculumPart 2: Nature & Function of Product MarketsPart 2: Nature & Function of Product Markets

(Makes up 55-70% of the AP exam)(Makes up 55-70% of the AP exam)

A. Supply and Demand (15–20%)A. Supply and Demand (15–20%) Market equilibriumMarket equilibrium Determinants of supply and demandDeterminants of supply and demand Price and quantity controlsPrice and quantity controls ElasticityElasticity Consumer surplus, producer surplus, and Consumer surplus, producer surplus, and

allocative efficiencyallocative efficiency Tax incidence and deadweight lossTax incidence and deadweight loss

MarketsMarkets

Today’s LEQToday’s LEQ: How do markets operate?: How do markets operate?

Economic SystemsEconomic Systems

Economic systems address Economic systems address scarcityscarcity What, how, and for whom to produce?What, how, and for whom to produce?

U.S. = U.S. = mixed market economymixed market economy Producers/Consumers (& limited Producers/Consumers (& limited

gov’t) answer these questionsgov’t) answer these questions

MarketsMarkets

The The marketmarket is the most important is the most important economic institution in a market economic institution in a market economyeconomy Exist when buyers and sellers interactExist when buyers and sellers interact

Can be local, national, or internationalCan be local, national, or international

This interaction determines prices & This interaction determines prices & therefore allocates therefore allocates scarcescarce goods and goods and servicesservices

Market IncentivesMarket Incentives

Prices send signals and provide Prices send signals and provide incentives to buyers and sellersincentives to buyers and sellers What would happen if the price What would happen if the price

of the average flat screen TV of the average flat screen TV jumped to $30,000?jumped to $30,000?

When supply or demand When supply or demand changes, market prices adjust, changes, market prices adjust, affecting incentivesaffecting incentives For example, what happened For example, what happened

when the price of gas exceeded when the price of gas exceeded $4.00 a gallon?$4.00 a gallon? Laugh if you get this joke… PLEASE.

Graphing SupplyGraphing Supply

Law of SupplyLaw of Supply:: When price When price

increases increases (decreases), the (decreases), the quantity supplied quantity supplied increases increases (decreases)(decreases)

Graphing DemandGraphing Demand

Law of DemandLaw of Demand:: When price When price

increases increases (decreases), (decreases), quantity quantity demanded demanded decreases decreases (increases)(increases)

Equilibrium PriceEquilibrium Price (Market Clearing Price) (Market Clearing Price)

The market settles at The market settles at this price and this price and quantityquantity QS = QDQS = QD

Why? At this point Why? At this point of intersection, of intersection, buyers and sellers buyers and sellers agree on both price agree on both price and quantityand quantity

Game Time!Game Time!“A Classroom Market for Crude Oil”“A Classroom Market for Crude Oil” Half of you will be Half of you will be buyersbuyers of barrels of crude of barrels of crude

oil, half of you will be oil, half of you will be sellerssellers

To Win:To Win:

BuyersBuyers: try to buy a barrel : try to buy a barrel of crude oil at the of crude oil at the lowest lowest possible pricepossible price. You should . You should not buy for more than the not buy for more than the price on your card.price on your card.

SellersSellers: : try to sell a barrel of try to sell a barrel of crude oil at the crude oil at the highest highest possible pricepossible price. You should . You should not sell for less than the not sell for less than the price on your card.price on your card.

DO NOT REVEAL THE PRICE ON YOUR CARD AT ANY TIME!

A few things worth mentioning…A few things worth mentioning… Any buyer can interact with any seller.Any buyer can interact with any seller. Goal of both buyers and sellers is to Goal of both buyers and sellers is to make as much money as make as much money as

you can.you can. You are free to make as many transactions in a round as time You are free to make as many transactions in a round as time

permits.permits. All transaction prices must be made in whole dollar All transaction prices must be made in whole dollar

increments.increments. When a transaction is made, both the seller and the buyer When a transaction is made, both the seller and the buyer

report the agreed upon price to the recorder. report the agreed upon price to the recorder. HINT: Watch the HINT: Watch the tally sheet so you know what prices are being paid for oil...tally sheet so you know what prices are being paid for oil...

After each transaction, turn in your card and receive a new After each transaction, turn in your card and receive a new one, reenter the marketplace, and resumeone, reenter the marketplace, and resume

Game RecapGame Recap At what price was crude oil most frequently sold in At what price was crude oil most frequently sold in

each round?each round? In which round did the greatest spread of prices In which round did the greatest spread of prices

occur?occur? Why did the prices become more clustered in later Why did the prices become more clustered in later

rounds?rounds? Did buyers and sellers determine the final price for Did buyers and sellers determine the final price for

crude oil?crude oil? How did competition among sellers and buyers How did competition among sellers and buyers

influence price?influence price?

Activities 4 & 5Activities 4 & 5 Construct the graph by placing dots at the points that Construct the graph by placing dots at the points that

correspond to all the combination of prices and correspond to all the combination of prices and quantities shown in the supply schedule on Activity quantities shown in the supply schedule on Activity 44

Do the same, but use small crosses instead of dots, Do the same, but use small crosses instead of dots, for the demand schedulefor the demand schedule

Connect the dots to produce the supply scheduleConnect the dots to produce the supply schedule Connect the crosses to produce the demand schedule Connect the crosses to produce the demand schedule Label each curveLabel each curve

SurplusSurplus If price is above the If price is above the

equilibrium price, equilibrium price, sellers would want to sellers would want to sell more than buyers sell more than buyers would want to buywould want to buy QS > QDQS > QD

ShortageShortage

If price is below the If price is below the equilibrium price, equilibrium price, buyers would want to buyers would want to buy more than sellers buy more than sellers would want to sellwould want to sell QD > QSQD > QS

Complete Activity 6Complete Activity 6

What is the market clearing price for bananas?What is the market clearing price for bananas? In the marketplace, how will this price be In the marketplace, how will this price be

determined? Remember, the store managers determined? Remember, the store managers try to sell their bananas at 89 cents per pound?try to sell their bananas at 89 cents per pound?

Describe an example of a surplus or a shortage Describe an example of a surplus or a shortage that you have experienced in the marketplace, that you have experienced in the marketplace, or that you have read about or heard about or that you have read about or heard about from someone else.from someone else.

Today’s Exit TicketToday’s Exit Ticket

Answer today’s LEQ on the back of Activity Answer today’s LEQ on the back of Activity 6. Be sure to use all of the key vocabulary 6. Be sure to use all of the key vocabulary listed below:listed below: Demand, Market, Equilibrium, Shortage, Supply, Demand, Market, Equilibrium, Shortage, Supply,

SurplusSurplus