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Today
3 questions for every society
Begin Demand
The Three Big Questions
Every economy must answer the following
three questions:
What to produce
How to produce it
For whom to produce (who gets it).
How are these questions anwered?
Depends on the type of economy.
Market Economy
The decisions are made by individual
consumers & firms. Firms decide:
what to produce based on profits & riskiness.
how to produce based on mkt-determined
waqes & prices of inputs.
Market Economy, Cont’d.
Who gets it is determined by how much
income each household gets.
In a market economy, prices coordinate
economic activity!
Centrally-Planned
Economy
Gov’t bureaucrats make these decisions
using complex problem-solving skills.
Mixed Economies
Some activity coordinated by prices, some
by bureaucrats
The Role of Gov’t in the
U.S. Includes:
providing legal structure/property rights/criminal
prosecution
public defense (military)
printing money
safety regulations
postal service
schools
income redistribution/social safety net
In Some Other Countries,
also:
provision of some industries (ex.: auto,
mining)
management of firms
wage/price controls
Property Rights &
Incentives
People will not work & produce unless
they benefit from it.
Profit motive: leads firms to produce
Property rights: ensure that what is
earned/purchased can be enjoyed (or
sold).
Property Rights &
Incentives, Cont’d.
A Pure Incentives System would lead to
inequality due to differences in ability,
effort, and luck.
A Pure Equality System has no incentive
for work, little will be produced.
Chapter 3
Demand & Supply
The Market for Cheese
The Demand for Cheese
Quantity Demanded: The number of
pounds of cheese that buyers are willing
& able to buy each week in Richmond.
(QD)
Determinants of Quantity
Demanded
Price of cheese
Household income
Price of other goods related in demand
Tastes/Preferences
Information/Expectations
Population/demographics of the market
Ceteris Paribus
. . . Holding all else constant
Economists focus on how QD responds to
changes in price, ceteris paribus.
The Demand Schedule
. . . is a table
that shows how
QD and P are
related.
Price
$1
$2
$3
$4
Quantity
400
300
200
100
The Law of Demand
As the price of a good falls, its quantity
demanded by the market will rise, ceteris
paribus.
The Demand Curve
Demand Curve: The demand curve tells
us how much will be demanded at every
possible price, ceteris paribus.
It is a graph of the demand schedule.
The Demand Curve
Price
($/lb.)
4
3
2
1
D
0
0
Only P
changes as
we move
along this
demand
curve.
(Ceteris
Paribus)
100 200 300 400 Quantity
(lb.per week)
Moving Along the Demand
Curve
Changes in the price of cheese move us
along the demand curve for cheese.
Called a “change in the quantity of cheese
demanded” or a “change the quantity
demanded”.
The Law of Demand,
Redux
Demand curves must slope downwards!
Shifts in Demand
Changes in other factors affecting
demand will shift the demand curve.
Called a “change in the demand for
cheese”.
Increase in Demand
Price
($/lb.)
The quantity
demanded is
higher at every
possible price.
Shifts
rightward.
4
3
2
D’
1
D
0
0
100 200 300 400
Decrease in Demand
Price
($/lb.)
The quantity
demanded is
lower at every
possible price.
Shifts leftward.
4
3
2
1
D’
0
0
100 200 300 400
D
Shifts in Demand
A
A
A
A
A
Change
Change
Change
Change
Change
in
in
in
in
in
Average Household Income
the Price of Another Good
Tastes or Preferences
Consumer Expectations
Demographics
Coming Up:
Next Time
Detailed look at shifts in demand
Study supply
Group Work
For each of the following scenarios, show
either a shift in or a movement along the
demand curve. Explain what you have
done using the terminology “demand” or
“quantity demanded”.
Exercises in Demand
Market: Razor scooters
Events: A new report is widely publicized that
shows they are unsafe.
Market: Heating Oil
Event: Consumers face some of the highest
prices in years.
Market: Brewed coffee in coffee shops
Event: rising income
More Exercises in Demand
Market: College Textbooks
Event: Some students don’t buy texts this
year since textbook prices rose sharply.
Market: French Fries
A bumper potato crop allows fast food
restaurants to cut their prices for fries.
Market: College Textbooks
Event: College enrollments are up 20%.