1. Allocation Mechanisms
Inputs or factors of production need to be used to produce goods and services. The ways such inputs can be utilized to serve the needs of consumers are called the allocation mechanisms. The market (price), government, random choice, and the first-come, first-served mechanisms are the most commonly used allocation mechanisms.

Teaching Strategy: Using the exercise in Preview in the text, survey the class about their response to the different situations. This is an excellent way of introducing the students to the notion of market mechanism and other means of allocating resources. You should expect a great deal of debate about the different allocation mechanisms.

1. Efficiency: If an allocation mechanism is efficient, it means that it best satisfies the needs and wants of a society compared to the other allocation mechanisms. A system of markets and prices is generally the most efficient way of allocating scarce resources. As a result, it is predominantly used in most industrial countries today.
   
   
2. Alternatives to market allocation: In some cases, the market system is not the best. One reason for this is that for some goods and services, such as health care and defense, people do not like the outcome of the market system. Another reason is that the market system is inefficient under some circumstances. When the market is not the best system, the government is often called on to allocate resources and goods.
   
   

• Disagreement with the market outcome
  
  
• Inefficiency
  
  

Teaching Strategy: Divide the class into groups and ask each group to make a list of several cases that either disagree with the market outcome or indicate that the price system is not efficient. Select one group to share their list with the class and choose another group to react to the first groups list. Then repeat the exercise with other groups. At the end, point out that the market system is not the best available allocation mechanism in some cases, although it is in most cases.


2. How Markets Function
A market is defined as a place where buyers and sellers get together and set prices and quantities.

Teaching Strategy: Give real-world examples of markets that students can conceptualize, for example, the market for X-Box, for illegal drugs, or for a local painter working on a cash-only basis.

The market process guides producers to produce goods and services demanded by consumers at the lowest possible price. As a result, those firms that cannot use resources most efficiently have to leave the market. Thus, the market process brings about efficiency and increases consumer welfare. Some have compared market efficiencies to economic Darwinism: survival of the fittest.


3. Demand

1. The law of demand: The quantity of a well-defined good or service that people are willing and able to purchase during a particular period of time decreases as the price of that good rises, ceteris paribus. Be sure to define this term.
   
   There are two points that economists advance to argue for a downward-sloping demand curvethe income and substitution effects. The income effect takes place when a change in the price of a good alters the consumers purchasing power. When the price of a good changes, and in turn the demand for a substitute good changes, the substitution effect is at work.
   
   Teaching Strategy: When beer prices fall during a Friday afternoon happy hour, bar patrons substitute more beer for other goods they could consume (the substitution effect). In addition, the increase in their purchasing power due to the less expensive beer allows them to buy more pretzels and pizza (the income effect).
   
   
2. The demand schedule is a list of the quantities of a good that consumers demand at different prices, ceteris paribus.
   
   Teaching Strategy: Pass out slips of paper and ask students what price they would pay for an A in the course. Generate a demand schedule a demand schedule with the results.
   
   
3. The demand curve is a downward-sloping curve that is made from the combinations of price and quantity demanded in the demand schedule.
   
   Teaching Strategy: Derive a demand curve from the demand schedule given in section 3.b.
   
   
4. A market curve is the horizontal summation of all individual demand curves.
   
   
5. Compare a movement along a demand curve, a change in demand, to a shift in the entire curve, a change in the quantity demanded. The determinants of demand are income, tastes, the prices of related goods, expectations, and the number of buyers.
   
   Teaching Strategy: Consider using a mnemonic to help students appreciate the various forces that can cause a change in demand: TYPENE.
   
   T = tastes
   
   Y = income
   
   P = price of related goods
   
   E = expectations
   
   N = number of consumers
   
   E = exchange rates
   
   Teaching Strategy: Ask your students to redraw their demand curves because they have just received $1,000 in lottery winnings.
   
   
6. International effects: If U.S. prices hold constant, demand curves for U.S. goods will shift as exchange rates vary and foreign purchases change.
   
   Teaching Strategy: Use the example of how demand is affected by changes in the exchange rate to illustrate how the U.S. economy is affected by the rest of the world.
   
   

4. Supply

1. The law of supply: The quantity of a good producers will sell is positively related to price, ceteris paribus.
   
   Teaching Strategy: Focus the law of supply around the profit motive of producers, that is, self-interest.
   
   
2. The supply curve is composed of all the combinations of prices and quantities supplied that are listed in the supply schedule.
   
   
3. The market supply curve is the summation of all the individual supply curves. It is the horizontal summationthe total amount provided by all producers at each price.
   
   
4. A change in supply occurs when the quantity supplied at every price changes, and a change in quantity supplied occurs when only the product price changes and all other factors hold constant.
   
   Again, consider using a mnemonic to help students appreciate the various forces than can cause a change in supply: PPETEN.
   
   P = price of resources
   
   P = price of related goods
   
   E = expectations
   
   T = technology
   
   E = exchange rates
   
   N = number of producers
   
   Teaching Strategy: Show a change in quantity supplied as a movement along a stationary supply curve, as shown in Figure 4 in the text. A change in supply occurs when the quantity supplied at every price changes due to a change in a factor other than product price, such as resource prices, technology, producer expectations, number of producers, or prices of related goods.
   
   Teaching Strategy: Show how an increase in rent paid by the DVD store will cause the supply curve for DVDs to shift to the left. Refer to Figure 4 in the text.
   
   
5. International effects: With U.S. prices held constant, supply curves for U.S. goods will shift as exchange rates vary and foreign purchases change.
   
   Teaching Strategy: Use the example of how supply is affected by events in other parts of the world to show how manufacturing costs can be affected by exchange rates.
   
   

5. Equilibrium: Putting Demand and Supply Together

1. Equilibrium is the situation where quantity demanded equals quantity supplied at a set price.
   
   Teaching Strategy: Ask students which blade of a scissors cuts paper. Answer a la Alfred Marshall, both, just as supply and demand determine price.
   
   
2. Demand shifts
   
   Teaching Strategy: Have each of your students imagine that she or he wins $5,000 in the lottery. Show how this would change the equilibrium price and quantity for cars. Have students use TYPENE to think of other factors that would cause a demand shift.
   
   
3. Supply shifts
   
   Teaching Strategy: Show the results of having two new car dealers in the market on the equilibrium price and quantity of cars. Have students use PPETEN to think of other factors that would cause a supply shift.
   
   

6. Alternatives to Market Allocation

1. Transaction costs are the costs involved in making an exchange.
   
   Teaching Strategy: Ask students if they know anyone who almost always fixes things him- or herself rather than pay someone else. Some of these people are just cheap, but others recognize the hassles associated with finding a repair person, waiting for the repair person to get the right parts, and finally make the repair (transaction costs).
   
   
2. Market failure is a situation in which the market is unable to allocate scarce goods, services, or resources.
   
   Teaching Strategy: Depending on where your school is located, there is probably an example of a common property resource that has been depleted or destroyed because of lack of control. Fisheries and water are usually good examples.
   
   
3. Negative externalities are the costs of a transaction that are borne by someone not directly involved in the transaction.
   
   Teaching Strategy: Students will see this topic again later in the text, but consider using an example (water or air pollution) to illustrate that negative externalities result in the wrong price and output in a market.
   
   
4. Positive externalities are the benefits of a transaction that are received by someone not directly involved in the transaction.
   
   Teaching Strategy: Consider the bumper sticker If you can read this, thank a teacher. Do we benefit from having people around us being able to read? One obvious benefit is other drivers can read road signs; another is workers can read instructions.