Microeconomics
Understanding the Market System
Program Support Notes by: Reproducing these support notes Helen Voidis B.Ec, Dip.Ed, Cert. IV You may download and print one copy of TAA these support notes from our website for your reference. Further copying or printing must be Produced by: reported to CAL as per the Copyright Act VEA Pty Ltd 1968 .
Commissioning Editor: Sandra Frerichs B.Ed, M.Ed.
Executive Producer: Simon Garner B.Ed, Dip Management
© Video Education Australasia Pty Ltd 2011
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For Teachers
Introduction
Economics investigates human behavior and its consequences in a world with scarce resources. Economic decisions involve the use of these resources in the production process of goods and services and the distribution of the proceeds of production. Microeconomics is a branch of economics that focuses on the allocation of scarce resources and the elasticity or sensitivity of consumers at the household level and producers at the firm level. This program will explore the way in which markets operate, the way market prices are determined and the means that are available for governments to intervene where market failure occurs.
Timeline
00:00:00 Introducing the market system 00:02:44 The law of demand and supply 00:06:15 Price elasticity 00:12:03 Market structures 00:15:08 Market failure and Government response 00:19:09 Credits 00:19:45 End program
Recommended Resources http://bised.ac.uk www.economicstutor.com.au Http://economics.mrwood.com.au www.econweb.com www.econguru.com/micro
2 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Student Worksheet
Initiate Prior Learning
1. Pair and share activity.
At the start of his book ‘Eat the Rich’ American writer PJ O’Rourke posed an interesting question: ‘Why do some places prosper and thrive while others just suck?’ In pairs discuss this statement and create a list of three of the wealthiest countries in the world and three of the poorest and give reasons for your choice. Share this with another group and as a class map the countries and list the reasons that you have identified for both categories.
2. Group activity.
You and three others were on a cruise boat that was sinking in the Pacific Ocean. Thankfully you have managed to escape on the rowboat but you can only take five of the following items. In your group decide which five items you will take. After you have made your selection create a table that lists the items, your reasons for choosing them and the opportunity cost related to each. Each group will report back to the whole class promoting a discussion of the economic term ‘opportunity cost.’ The items available for selection are:
• a digital camera
• 3 bottles of water
• Oars
• Flare
• Sunscreen
• lifejackets for each of you
• first aid kit
• binoculars
• two fishing rods
• two torches and spare batteries
3 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
3. Brainstorm activity.
Tab Diet Cola was a soft drink introduced by Coca-Cola in 1963. Sales around the world declined with the introduction of Diet Cola in 1982. The diet drink is still available for purchase today in some parts of Africa, Spain, Hong Kong and the USA. Why do you think it disappeared from Australian supermarkets? Develop a list of other products that have been available on the market but have now disappeared. As a class brainstorm some of the possible reasons why.
4. Analytical activity.
A market is a place or situation where potential buyers and sellers get together to exchange goods or services. Create a table with three headings: Local market, National market and International market and identify at least three markets that belong to each of these categories.
Local Market National Market International Market
4 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Active Viewing Guide
Introducing the market system
1. Fill in the missing words to complete the following sentence:
The fundamental problem of scarcity relates to people having ______
______and ______.
2. Define the term ‘opportunity cost of a resource’ and provide an example to demonstrate your understanding.
______
______
______
______
______
3. Identify the three important questions that every nation needs to answer when dealing with the problem of scarcity:
• Question 1
______
______
• Question 2
______
______
• Question 3
______
______
5 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
4. Provide an explanation for each of the economic terms in the table below:
Key economic term Explanation
Market
Market mechanism
Equilibrium price
Consumer sovereignty
The law of demand and supply
5. The Law of Demand states that:
______
______
______
6. Circle True or False for the following statements:
a) A demand curve shows the effect of price on the quantity demanded.
True or False
b) If the price is low the quantity demanded will also be low.
True or False
c) A small rise in price leads to an increase in demand for that product.
True or False
d) Movement along the demand curve is controlled by consumer preferences.
True or False
6 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
e) The demand curve can shift to the right or left because of changes in a consumer’s disposable income.
True or False
7. If the price of coffee increased this will lead to a rise in demand for:
______
______
8. The law of supply tells us:
______
______
9. Movement along the supply curve is controlled by price – provide an example to demonstrate your understanding of this principle.
______
______
______
10. Circle True or False for the following statements:
a) If the supply curve shifts to the right then the supply will increase at all price levels.
True or False
b) If the price of inputs increased then the supply curve would shift to the right.
True or False
c) A shortage of goods is created when demand is much lower than the supply available.
True or False
d) When the price of goods is too high, demand will fall below the supply levels creating a surplus of goods.
True or False
7 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Price elasticity
11. Elasticity = ______
12. a) Which of these items would not be considered an inelastic good?
petrol jewellery salt
b) Which of these items would be considered elastic goods?
luxury cars chocolate bars massages
13. Factors that affect the elasticity of demand include:
______
______
______
14. Factors that affect the elasticity of supply include:
______
______
______
15. Differentiate between the setting of a price floor and a price ceiling and provide an example of each to demonstrate your understanding.
______
______
______
______
______
8 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Market structures
16. Discuss the main features of each of the following market structures and, where possible, provide examples of organizations that fit into these structures.
a) Perfect competition
______
______
______
______
______
______
______
______
c) Oligopoly
______
______
______
______
d) Monopoly
______
______
______
______
9 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Market failure and government responses
17. When would the allocation of resources be efficient?
______
______
18. Discuss one cause of market failure and suggest a way that this can be addressed.
______
______
______
19. Describe what the government can do to reduce the overproduction of socially undesirable goods and services.
______
______
______
______
20. Evaluate the role of the government during periods of economic instability for a nation.
______
______
______
______
______
10 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Extension Activities
1 Pair activity
Demand and Supply curves are affected by both complimentary and substitute goods. Compile a list of five goods or services together with their substitute e.g. butter and margarine and five goods or services with their complementary e.g. stapler and staples. Share your list with two other students in your class.
2. Investigation activity
Visit three or four locations in your local area that sell bananas or strawberries and record the current prices for a kilo. Create a set of demand and supply graphs that demonstrate what happens when the price of either fruit increases and decreases. Provide a short report regarding the seasonal nature of this product and its effect on stakeholders.
3. Internet research activity
Select a market structure and conduct some research through the Internet. Prepare a magazine article for an Economics magazine that provides a detailed discussion of the key features of your selected structure, and examples of organization with this market structure that exist around the world. Provide a critique of your market structure identifying both its strengths and weaknesses.
4. Group work activity - brochure
Research the role of the government to address the issue of market failures. Explore both the underproduction of socially desirable public goods and services, and the over production of socially undesirable goods and services. Present your information in a brochure that clearly identifies the role of governments in situations where the market fails to achieve efficiency.
5. Survey and report
Develop a series of questions that explore the spending habits of a group of consumers. Include questions on their spending patterns on necessities and luxury items. Provide a summary of your findings in the form of graphs with a short report that identifies how market forces affect your group’s standard of living. Remember to also include products that would be price inelastic. Aim to interview at least 10 - to 15 respondents. Share your findings with other students in the class.
11 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Suggested Student Responses
1. Pair and share activity.
At the start of his book ‘Eat the Rich’. American writer PJ O’Rourke posed an interesting question ‘Why do some places prosper and thrive while others just suck?’ In pairs discuss this statement and create a list of three of the most wealthy countries in the world and three of the poorest and give reasons for your choice – share this with another group and as a class map the countries and list the reasons that you have identified for both categories. Answers will vary but may include countries like Australia being identified as a wealthy nation because of its rich natural resources that can be exported including coal, iron ore and crude petroleum. Poor countries may include Bangladesh because of its low standard of living and recurrent affliction of natural disasters.
2. Group activity.
You and three others were on a cruise boat that was sinking in the Pacific Ocean. Thankfully you have managed to escape on the rowboat but you can only take five of the following items. In your group decide which five items you will take. After you have made your selection create a table that lists the items, your reasons for choosing them and the opportunity cost related to each. Each group will report back to the whole class promoting a discussion of the economic term ‘opportunity cost.’ The items available for selection are:
• a digital camera
• 3 bottles of water
• Oars
• Flare
• Sunscreen
• lifejackets for each of you
• first aid kit
• binoculars
• two fishing rods
• two torches and spare batteries
Answers will vary but the students need to develop a definition of opportunity cost which could be the loss of the next best option available to the consumer i.e. the opportunity cost of selecting the digital camera is forgoing the 3 bottles of water etc.
12 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
3. Brainstorm activity.
Tab Diet Cola was a soft drink introduced by Coca-Cola in 1963. Sales around the world declined with the introduction of Diet Cola in 1982. The diet drink is still available for purchase today in some parts of Africa, Spain, Hong Kong and the USA. Why do you think it disappeared from Australian supermarkets? Develop a list of other products that have been available on the market but have now disappeared. As a class brainstorm some of the possible reasons why. Answers will vary but may include the negative publicity from one of the key ingredients in the soft drink, the introduction of a preferred substitute by consumers, changes in consumer tastes etc. Other products that have disappeared from the Australian market include Polly Waffle chocolate bars and Leed lemonade.
4. Analytical activity.
A market is a place or situation where potential buyers and sellers get together to exchange goods or services. Create a table with three headings: Local market, National market and International market and identify at least three markets that belong to each of these categories.
Local Market National Market International Market Answers will vary but may Answers will vary but may Answers will vary but may include include include
Farmer’s monthly markets Magazines like: Napoleon make up etc.
St Kilda markets New Idea
Women’s Day
13 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
Active Viewing Guide
Introducing the market system
1. Fill in the missing words to complete the following sentence:
The fundamental problem of scarcity relates to people having unlimited wants and limited resources .
2. Define the term ‘opportunity cost of a resource’ and provide an example to demonstrate your understanding. The Opportunity Cost of a resource refers to the next best alternative use to which that resource could be placed e.g. logging a rainforest prevents the carbon capture performed by the forest as well as the loss of tourist income.
3. Identify the three important questions that every nation needs to answer when dealing with the problem of scarcity:
• Question 1 What to produce?
• Question 2 For whom to produce?
• Question 3 How much to produce?
4. Provide an explanation for each of the economic terms in the table below:
Key economic term Explanation
A mechanism by which goods and services produced are Market bought and sold.
Refers to the way in which producers and consumers Market mechanism interact to determine the price that a good or service will be exchanged for, and how many times.
The price at which buyers and sellers are willing to do a Equilibrium price deal.
The idea that consumers ultimately decide what is produced Consumer sovereignty and in what amount with suppliers responding to the actions of the consumer
14 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
The law of demand and supply
5. The Law of Demand states that: The Law of Demand states that when the price of a good or service falls, more people will buy it more often
6. Circle True or False for the following statements:
a) A demand curve shows the effect of price on the quantity demanded.
True or False
b) If the price is low the quantity demanded will also be low.
True or False
c) A small rise in price leads to an increase in demand for that product.
True or False
d) Movement along the demand curve is controlled by consumer preferences.
True or False
e) The demand curve can shift to the right or left because of changes in a consumer’s disposable income.
True or False
7. If the price of coffee increased this will lead to a rise in demand for Tea as consumers will look for a cheaper substitute to replace the more expensive coffee.
8. The Law of Supply tells us: The Law of Supply tells us that as prices rise, producers expand the quantity of goods supplied.
9. Movement along the supply curve is controlled by price – provide an example to demonstrate your understanding of this principle. If the price of an IPAD is $400 there will be more supplied at this point than if the price drops to $200 as suppliers have an incentive to produce more when the price increases as opposed to when the price is lower or decreases.
10. Circle True or False for the following statements:
a) If the supply curve shifts to the right then the supply will increase at all price levels.
True or False
b) If the price of inputs increased then the supply curve would shift to the right.
True or False
c) A shortage of goods is created when demand is much lower than the supply available.
True or False
15 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
d) When the price of goods is too high demand will fall below the supply levels creating a surplus of goods.
True or False
Price elasticity
11. Elasticity = % change in Quantity % change in Price
12. a) Which of these items would not be considered an inelastic good?
petrol jewellery salt
b) Which of these items would be considered elastic goods?
luxury cars chocolate bars massages
13. Factors that affect the elasticity of demand include: Substitutes, degree of necessity, habits, time and relative cost
14. Factors that affect the elasticity of supply include: Amount of spare production capacity, the level of finished goods, the time period, the storability of goods.
15. Differentiate between the setting of a price floor and a price ceiling and provide an example of each to demonstrate your understanding. A price floor is the lowest legal price that a commodity can be sold. This strategy might be used by the government to prevent prices from being too low e.g. used for agricultural commodity price. Whereas a price ceiling is the maximum legal price of a commodity, which is set by the government below the natural market equilibrium e.g. housing rentals
Market structures
16. Discuss the main features of each of the following market structures and where possible provide examples of organizations that fit into these structures.
a) Perfect competition There are many small sellers, each having a small share of the market. Sellers offer the same product so there is no product differentiation or price competition. Sellers can enter and exit the market freely. They are price takers- this form of market structure does not exist in the real world.
b) Monopolistic Competition There are many firms with a small market share. There are low barriers to entry and exit from the market, some differentiation of products and a degree of price control with non- price competition, with advertising usually playing an important role. As a result firms are able to influence the price. Markets of this type include restaurants, fitness centers and hairdressing salons.
16 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .
Microeconomics Understanding the Market System
c) Oligopoly Several large firms dominate the market. The barriers to entry and exit are high and firms have the ability to set prices. There is intense completion between firms both in price and non-price methods. Because of the size of each firm, the action of one has a strong influence on the others hence they are highly interdependent. Examples include supermarkets like Coles and Woolworths or process food companies like Kraft and Nestlé’s.
d) Monopoly There is only one supplier and no competition. Barriers to entry are extremely high and the firm sets the price. True monopolies exist only in government controlled markets e.g. In India the government runs the railways. We could also consider Microsoft in the personal computer market with its Windows operating system.
Market failure and government responses
17. When would the allocation of resources be efficient? The allocation of resources would be efficient when the resources are used to produce goods and services that best provide for society’s needs and wants.
18. Discuss one cause of market failure and suggest a way that this can be addressed. One cause of market failure is when there is underproduction of socially desirable goods and services such as education, health services and housing. Governments fund the provision of such services through taxes.
19. Describe what the government can do to reduce the overproduction of socially undesirable goods and services. To reduce the overproduction of socially undesirable goods and services such as cigarettes, gambling and alcohol, governments impose higher taxes, place bans or restrict their use and also impose a minimum age for purchasing cigarettes and alcohol as a controlling mechanism.
20. Evaluate the role of the government during periods of economic instability for a nation. (5 lines) Governments attempt to limit the economic extremes of booms and recessions by managing the level of macroeconomic demand. Inequity in income distribution is a natural trend in a freely operating market with growing extremes between rich and poor people. Governments can seek to remedy this type of market failure by implementing a progressive tax system, providing welfare benefits for the financially disadvantaged, setting minimum wages to avoid the exploitation of employees by employers and offering free government services.
17 © Video Education Australasia Pty Ltd 2011 Reproducing these support notes You may download and print one copy of these support notes from our website for your reference. Further copying or printing must be reported to CAL as per the Copyright Act 1968 .