Capitalism: A Market Economy Written by Ashley Hopkins and Frank Flanders, Ed.D. Resource Network 2010

Objectives 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 Also known as capitalism All resources are privately owned Any income derived from selling resources goes exclusively to each resource owner 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 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?

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.

How should the goods and services be produced? In a market economy… 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? In a market economy, supply and demand determine the prices and quantities of goods and services produced.

Supply 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. Price Quantity S1 S2

Demand 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 Quantity D1 D2

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.

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.

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.

Equilibrium When the amount of a product being supplied is equal to the amount being demanded, equilibrium exist. When supply equals demand, everyone wins!

Supply and Demand Equilibrium Price Quantity

Elastic vs. Inelastic 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. 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 How does a market economy answer the three economic questions?  What?  How?  For 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… Explain the three supply and demand conditions. Which is the desired condition?  Surplus  Shortage  Equilibrium What is the difference between elastic and inelastic?