2.0 HOW MARKETS WORK AND WHY THEY OFTEN FAIL
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MICROECONOMICS
MACROECONOMICS MARKETS DEMAND SUPPLY MARKET EQUILIBRIUM PRICE NON-PRICE FACTORS ELASTICITY |
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DRIVING QUESTIONS:
1. WHAT ARE MARKETS AND HOW CAN THEY BE EXPLAINED? 2. ARE MARKETS EFFICIENT? 3. IS THE MARKET SYSTEM THE BEST WAY TO ORGANIZE AN ECONOMY? 4. IS THE MARKET SYSTEM EQUITABLE? |
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1. ECONOMIC SYSTEMS
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| the_economic_problem_game.pptx |
THE DEBRIEF:
| the_economic_problem_game.docx |
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2. WHAT ARE MARKETS AND WHAT CONSTITUTES A MARKET?
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Markets are some of the oldest human institutions; the earliest markets no doubt dated back to pre-history. The underlying reason for the success of markets is the division of labour and the benefits gained from trade due to lower opportunity cost. They are able to coordinate answers to the 3 economic questions through an often seamless process of transactions between consumers (buyers) and firms (producers); Adam Smith the Father of Economics referred to this process of seamless trade as 'the invisible hand of the market'. Watch the two clips below and reflect on why a market system is likely to be more successful than a system reliant on government planning.
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| microeconomics_and_macroeconomics_5.pdf |
| the_role_of_markets.pdf |
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3. HOW CAN WE CHARACTERIZE THE LAW OF DEMAND?
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THE LAW OF DEMAND: The Law of Demand is one of two laws together with the Law of Supply (more later) which explains why markets function effectively. Over the course of this lesson you will model the Demand curve and understand the factor of 'price' and other non-price determinants that affect consumer demand for goods and services.
| demand_lessons_1_and_2-6_gcse.docx |
| demand_7.pdf |
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What non-price factors affect the demand for these products?
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4. WHAT IS THE LAW OF SUPPLY AND HOW CAN WE CHARACTERIZE IT?
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If the benefits which consumers gain from using a product (utility) explains the price they are willing to pay for the product, what explains the price which firms are willing to produce the product? At higher prices firms will have potential for greater profits, at lower prices firms will have less. What though are the non-price determinants of supply, what will make firms supply more of a good or less of a good at any given price?
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| supply_lessons_1_and_2_igcse.docx |
| supply_8.pdf |
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5. WHAT DETERMINES THE PRICE OF SOMETHING AND WHY IS PRICE SO IMPORTANT?
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INTRODUCTION: Now that you have discovered the price and non-price factors that affect demand and supply in different markets we will now consider the interaction between the two. If you plot a demand and supply diagram you will observe that there is only one point of intersection between the demand and supply curves in a given market; this point is called MARKET EQUILIBRIUM. At this point the price and quantity supplied to a market can be observed. It is important to note as shown in the video clip below that this point is fluid and changes with the market conditions of demand and supply. As non-price factors of demand and supply change so will market equilibrium and therefore the price and quantity within a market. In the following activities you will model the changing nature of market equilibrium.
STARTER: Recap: on either side of a whiteboard, list the non-price factors of supply and demand and draw a demand and supply curve and show the concept of movements and shifts.
ACTIVITY ONE:
| igcse_market_equilibrium.docx |
ACTIVITY TWO: Read the following articles and model the follow changes to market equilibrium that have occurred in the market for quinoa over the past decade create a diagram for each article:
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Exam Style Questions
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| price_determination_9.pdf |
| price_changes_10.pdf |
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6. WHAT DO WE MEAN BY ELASTICITY AND WHAT IS PED?
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INTRODUCTION: What do we mean by elasticity generally? If a rubber band is elastic what does this mean? How does an elastic rubber band RESPOND to being pulled? How does a length of copper wire respond to being pulled? Which is more elastic? Which is inelastic. The basic idea of elasticity is the idea of RESPONSIVENESS and SENSITIVITY to a CHANGE. The change variable that we will mainly be considering is PRICE and particularly how DEMAND and SUPPLY respond to changes in PRICE.
In this first lesson on elasticity you will consider the responsiveness of demand to a change in price. This is referred to as PRICE ELASTICITY OF DEMAND. How does a change in price affect how much of a good or service a consumer is willing to buy? Lets take for example the case of a 20% price change, this could be either be an increase or a decrease in the price by 20%. How would the Demand for the following products respond to a 20% change and why? In groups consider the following products and jot down 3 or 4 ideas for each hypothesizing how consumer demand would respond to a 20% price change. Would the change in demand be lesser or greater than 20%?
In this first lesson on elasticity you will consider the responsiveness of demand to a change in price. This is referred to as PRICE ELASTICITY OF DEMAND. How does a change in price affect how much of a good or service a consumer is willing to buy? Lets take for example the case of a 20% price change, this could be either be an increase or a decrease in the price by 20%. How would the Demand for the following products respond to a 20% change and why? In groups consider the following products and jot down 3 or 4 ideas for each hypothesizing how consumer demand would respond to a 20% price change. Would the change in demand be lesser or greater than 20%?
ACTIVITY 1: Hypothesis the elasticity of demand for some commonly purchased goods and services?
- What makes the item elastic or inelastic?
- Is the item elastic or inelastic?
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Activity 2: Watch the following clip and take notes to minute 4.10. Your teacher will stop occasionally so that you are able to consider the diagrams and copy them down. Once you have watched the clip you should take notes under the following headings using pages 61-64 of the textbook. Make sure to take time to ensure your presentation is excellent and you are taking notes that you will be able to effectively revise from.
- Define PED.
- Give some examples of the determinants of PED for a newspaper, holidays and cars.
- What is the equation for PED, give an example.
- Complete a calculation using Activity 2.20 on page 62.
- Explain how are PED and Revenue linked.
- What affects PED?
- Draw the 3 'special' demand curves and annotate them explaining their meaning.
Activity 3: Complete the exam style questions below:
| ped_11.pdf |
ACTIVITY 3: Watch the following clip and decide whether soda taxes (taxes on high sugar soft drinks) are a good idea?
What is the purpose of a soda tax?
Is soda an elastic or inelastic good?
How effective would a soda tax be?
Draw a diagram to explain the effects of a soda tax?
What would be some advantages and disadvantages of government implementing a soda tax?
Would you advise the government to do this?
What is the purpose of a soda tax?
Is soda an elastic or inelastic good?
How effective would a soda tax be?
Draw a diagram to explain the effects of a soda tax?
What would be some advantages and disadvantages of government implementing a soda tax?
Would you advise the government to do this?
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ACTIVITY 4: Public Policy and Business applications of PED. In the following scenarios your group are going to play the part of economic advisors. Give advice applying the theory of Price Elasticity of Demand to come to a reasoned economic judgement. Use diagrams if necessary to explain your ideas
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Case Study 1: A decision by Coca-cola to cut the price of its Cola drink, considering the impact on another soda drink Fanta (also owned by the company Coca- Cola).
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Case Study 2: A gun government buy-back scheme to try to reduce gun related crimes and deaths.
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Case Study 3: An indirect tax by government on cigarettes to try to reduce consumption and the impact of cigarette related illnesses
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7. WHAT IS PES AND WHY ARE ELASTICITIES SO IMPORTANT TO KNOW?
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INTRODUCTION: The basic idea of elasticity is the idea of RESPONSIVENESS and SENSITIVITY to a CHANGE. In this lesson the change variable that we will be considering is PRICE and particularly how SUPPLY responds to changes in PRICE.
In this first lesson on elasticity we considered the responsiveness of demand to a change in price. This was referred to as PRICE ELASTICITY OF DEMAND. In this second lesson we will be considering how SUPPLY responds to a change in price. How does a change in price affect how much a firm is willing to supply to the market? Lets take for example the case of a 20% price change, this could be either be an increase or a decrease in the price by 20%. How would the SUPPLY for the following products respond to a 20% change and why? In groups consider the following products and jot down 3 or 4 ideas for each hypothesizing how FIRMS SUPPLY would respond to a 20% price change. Would the change in SUPPLY be lesser or greater than 20%?
In this first lesson on elasticity we considered the responsiveness of demand to a change in price. This was referred to as PRICE ELASTICITY OF DEMAND. In this second lesson we will be considering how SUPPLY responds to a change in price. How does a change in price affect how much a firm is willing to supply to the market? Lets take for example the case of a 20% price change, this could be either be an increase or a decrease in the price by 20%. How would the SUPPLY for the following products respond to a 20% change and why? In groups consider the following products and jot down 3 or 4 ideas for each hypothesizing how FIRMS SUPPLY would respond to a 20% price change. Would the change in SUPPLY be lesser or greater than 20%?
ACTIVITY 1: Hypothesis the elasticity of supply for some commonly produced goods and services?
- What makes the item 'Supply' elastic or inelastic?
- Is the item 'Supply' elastic or inelastic?
Fig. 1. Fidget Spinners
Fig.5. Picasso Paintings
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Fig.2. Kale Farm
Fig.6. Tottenham Hotspur Stadium
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Fig. 2. Iphone XI
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Fig.3. Button Mushroom Farming
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Fig.4. Avocado Tree Ready for Harvesting
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ACTIVITY 2: Watch the following clip and take notes to minute 6.21. Your teacher will stop occasionally so that you are able to consider the diagrams and copy them down. Once you have watched the clip you should take notes under the following headings using pages 66-70 of the textbook. Make sure to take time to ensure your presentation is excellent and you are taking notes that you will be able to effectively revise from.
- Define PES.
- Give some examples of the determinants of PES for Avocados, Button Mushrooms and iPhone XI.
- What is the equation for PES, give an example.
- Complete a calculation using Activity 2.23 on page 69.
- What affects PES?
- Draw the 3 'special' demand curves and annotate them explaining their meaning.
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ACTIVITY 3: Watch the video below on the process of making an iPhone. Is it true to say that ALL manufactured goods are relatively elastic in Supply? How does a complex supply-chain affect elasticity of supply? What are the relative elasticities of the primary raw materials that make the components of an iPhone. On the whole is an iPhone elastic or inelastic in supply. Use you list of criteria from the notes you have taken to suggest an iPhone XI elasticity of Supply.
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ACTIVITY 4: Complete the exam style questions.
| pes_12.pdf |
ACTIVITY 5: Complete the crossword below. You can find the original on page 74 in the Second Edition.
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8. WHAT ARE SOCIAL COSTS AND BENEFITS AND HOW CAN THE DECISIONS OF CONSUMERS AND FIRMS AFFECT OTHERS?
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INTRODUCTION: To this point in our unit on the market system we have considered the benefits and costs to consumers and firms of economic activity. We have been considering PRIVATE BENEFITS AND PRIVATE COSTS. However it should be understood that Economic activity places additional costs upon society and these are often not accounted for in the cost/price that consumers and firms pay. These additional costs or benefits to society are called EXTERNALITIES. They are an example of MARKET FAILURE as the market does not take account of these EXTERNALITIES and as a result will OVER ALLOCATE OR UNDER ALLOCATE RESOURCES to the production of these goods. It is often the role of government to correct these EXTERNALITIES and this can be achieved in a variety of ways to correct the market failure.
ACTIVITY 1: identify the private benefits and private costs and think of any External Benefits or Costs of the Economic Activities Below:
Factory Pollution
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Congestion
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Alcohol-related anti-social behavior
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Passive smoking
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Higher Education
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NASA Space Program
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Vaccination
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New Jobs
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ACTIVITY 2: Complete the Note taking task from the Powerpoint below:
| externalities_3.pptx |
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ACTIVITY 3: Complete some research on a Production or Consumption externality that you are aware of. You should model it like the Micro-beads case study in the Powerpoint. You can present it as a single Powerpoint slide and give some suggestions also for how the government might deal with the Market Failure.
ACTIVITY 4: Now that you have an understanding of the issues arising from consumption or production externalities you are going to role-play a conflict between 2 groups. You can either use the Activity 2.24 'Not Painting a Pretty Picture' case study or use one of your own that you researched as part of Activity 3. If you choose to use your own case -study be sure to use all of the questions in the 2.24 activity to help structure your discussions and adapt the questions 1-4 on page 81 to fit the case study you are using. Be prepared to feed back to the rest of the class. You have 15 minutes to come to a resolution of the conflict! |
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ACTIVITY 5: Take the Socrative test on Introduction to the Market system by logging onto socrative.com and by going to room 114151. Before you complete the quiz you should complete 20 minutes or so of revision to ensure that you recap on the main content studied to date. When you're ready visit the quiz site-good luck!
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9. WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A MARKET SYSTEM AND WHAT ARE THE ALTERNATIVES?
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Introduction: The market system is the dominant economic system. It has been the most effective solution to answering the 3 economic questions of what, how and for whom to produce for. However markets do not always answer the 3 economic questions to societies satisfaction and this is called Market Failure; there are several examples of market failures and the main forms of market failure that you need to be aware of are listed below. You will also need to understand how governments try to address the problem of market failure and some of the likely problems with this.
| market_economic_system_13.pdf |
ACTIVITY 1: Do some research on each of the market failures listed below include some REAL WORLD EXAMPLES in your explanation, you will need to complete some research for these.
- Public goods will not be provided
- Too few merit goods will be supplied and consumed
- Some firms may exploit their consumers and employees
- Factor immobility obstructs the ability of firms to allocate resources efficiently
- Goods and services with significant external costs may be over-provided
- Goods with significant external benefits may be under-provided.
ACTIVITY 2: So how can governments intervene to address market failure and what may be some of the consequences if it chooses to do so? Take one of the solutions below and prepare a short presentation of what it is and how it attempts to correct a market failure. You should also explain any consequences/problems that the solution may create. There are some resources to have a look at too, but you should include your own examples too.
Solution 1: Direct provision of goods and services
Solution 3: Setting maximum prices
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Solution 2: Regulations
Solution 4: indirect taxes and subsidies
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9. WHAT CAUSES A MARKET TO FAIL AND WHAT ARE THE CONSEQUENCES?
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| market_failure_14.pdf |
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9. WHAT IS A MIXED ECONOMY AND WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THESE?
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| market_economic_system_13.pdf |
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Lessons 10 and 11: MARKETS ASSESSMENT (2 lessons): You are now going to create a short educational film on how markets function and the unique characteristics of individual markets. You will need to describe and characterize the following topics and how they relate to markets: Market scales and the difference between micro and macroeconomics, market resource allocation, demand and supply, price determination, price changes, PED and PES, market economy's and mixed economic systems and of course market failure. For some ideas of how you could create a short film and what this might look like watch this previous year's film and in pairs critique for all of the content above and whether it does a good job of explaining how markets work. Share your ideas with the rest of the class. When you have done this you can begin to plan your own film. You will have 2 lessons and a homework to complete your film. You may work in groups of no more than 3.
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Thanks to Robert Harrison, Elena Michel, Kai Linkin and Marcus Jedig!
ADDITIONAL RESOURCES AND ACTIVITIES:
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ADDITIONAL READING |