Distinguish between different groups and their motives in a market economy. Distinguish between a shortage of goods and a surplus of goods in a

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2 Distinguish between different groups and their motives in a market economy. Distinguish between a shortage of goods and a surplus of goods in a market economy. Determine what creates a shortage of goods and a surplus of goods. Explain what questions must be asked when determining price in market economy.

3 Shortage Surplus Equilibrium Point

4 Different economic groups have different goals: Consumers want low prices Employers want to pay low wages Producers want to sell their good for the highest price possible Workers want to earn the highest wages In other words, everyone is fueled by the profit motive - - everyone is looking out for their own best interest. These groups have to reach a compromise.

5 Consumers and Employers must agree to pay high enough prices or wages to get the goods and services that they need. Producers and workers must agree to accept prices and wages low enough so that they can sell their goods or services. If a good compromise is reached, workers will earn a living, producers will make a profit, and there will be neither a shortage or a surplus of goods or services.

6 Shortage too little of a product or service to meet the demand Surplus more of a product or service than is demanded The laws of supply and demand help producers find the right price for their product.

7 A manufacturer in Kansas made 1000 skateboards and decided to charge $50 each Consumers only bought 200 at this price. This left a surplus of 800 skateboards A manufacturer in South Carolina made 1000 skateboards and sold them for $10 each. Consumers bought all 1000 and wanted more This created a shortage of skateboards.

8 When the price was too low, the manufacturer sold a lot of skateboards and made a small profit. The shortage was great. The manufacturer would could have sold more skateboards, or he could have sold them for a somewhat higher price and made a bigger profit When supply and demand are balanced, the market is said to be in a state of equilibrium

9 Blossom Farms wants to raise carnations to sell to local flower shops. Before they plant any seeds, however, they must learn if there is a market for carnations. Blossom Farms wants to be sure they can sell enough carnations to make a profit. What questions will help them find out how many carnations they can sell?

10 How big is the market? How many flower shops in the area? If the area has many flower shops, Blossom Farms can probably sell a lot of carnations. In general, the larger the market, the higher the level of demand. What is the level of competition? How many other growers are selling carnations to these flower shops?

11 How much money do people in the area have to spend on flowers? If the customers in this area have low incomes, the level of demand for flowers will probably be low. If they have high incomes, the level of demand will probably be higher. Flowers are not a necessity. The level of demand for flowers will probably not be high unless customers have fairly high incomes.

12 Do people in this area like carnations? Or are there other flowers more popular? What other things might customers prefer to buy? How much will flower shops pay for carnations? Will this be more than what your production cost is? What kind of profit can Blossom Farms make?

13 Mrs. Clark, the owner, decides to do some market research to answer these questions: There are many flower shops in nearby towns therefore the market for carnations is large There is some competition some flower shops have carnations shipped in. Most florists would prefer fresh flowers, locally grown. Most people who live nearby have fairly high incomes. Carnations are one of the most popular flowers.

14 So far, things are looking good. Mrs. Clark found positive answers to most of the questions. Now she must decide if they can make a profit selling carnations. How much should Blossom Farms sell their carnations for? She needs to do more research to find out how many dozen carnations were bought by local florists at different times and different prices.

15 Price Per Dozen Number of Dozen Demanded $ $ $ $ $ $ $ As expected, demand is much greater at a lower price than it is at a higher price.

16 Price per Dozen Number of Dozen Offered $ $ $ $ $ $ $ As expected, when the price got lower the number of carnations that farmers were willing to grow is much less.

17 Equilibrium Point The point where supply and demand are in balance. At the equilibrium point all of the carnations are sold and the demand is satisfied. Mrs. Clark wants to sell her carnations for the highest price possible, but she knows if she charges too much, she won t be able to sell them. If she charges too little, she will not make a profit.

18 Looking at Mrs. Clark s research, she sees that when carnations are selling for $9.00 there is a surplus on the market. (too many people are producing them) While there is a surplus, it turns out most people aren t willing to pay this price. When carnations are $5.00 per dozen, there is soon a shortage of carnations. Lots of people want to buy them at this price, but not many growers will sell at this price.

19 Price Per Dozen Number of Dozen Demanded $ $ $ $ $ $ $ Price per Dozen Number of Dozen Offered $ $ $ $ $ $ $

20 $10 $9 $8 $7 $6 $5 $4 $ = Dozens Offered = Dozens Demanded

21 Supply and demand are not the only influences on price. For example: Blossom Farms is the only grower of carnations in the area The carnations it sells to flower shops are fresh These two factors may allow Mrs. Clark to raise her prices slightly

22 1) What is meant by shortage? 2) What is meant by surplus? 3) What is meant by equilibrium price? 4) How did Mrs. Clark decide on the price to charge for Blossom Farms carnations? 5) What might happen to Blossom Farms business if other growers opened businesses nearby?