Chapter 3Chapter 3Demand and Demand and SupplySupply

Circular Flow ModelCircular Flow Model

What things flow What things flow from each sector of from each sector of the economy?the economy?

From Firms?From Firms? From Households?From Households?

DemandDemand

Willingness to buy at a certain price.Willingness to buy at a certain price. Law of DemandLaw of Demand Demand ScheduleDemand Schedule Demand CurveDemand Curve

What factors affect demand?What factors affect demand?

Determinants of DemandDeterminants of Demand(Shift in Curve)(Shift in Curve)

TastesTastes IncomeIncome

Income Rise= Demand RiseIncome Rise= Demand Rise Price of related productsPrice of related products

Substitute goodsSubstitute goods Hot Dogs vs. HamburgersHot Dogs vs. Hamburgers

Complementary goodsComplementary goods Products used with each otherProducts used with each other

Cars and Gas (SUV’s)Cars and Gas (SUV’s)

Number of Potential CustomersNumber of Potential Customers

The Law of SupplyThe Law of Supply

SupplySupply # of units firm is willing to sell# of units firm is willing to sell

Diminishing returnsDiminishing returns Cost of producing additional items increasesCost of producing additional items increases

Law of supplyLaw of supply Higher prices = higher quantity suppliedHigher prices = higher quantity supplied

Changes in SupplyChanges in Supply

Costs of ProductionCosts of Production Increased cost = decreased supplyIncreased cost = decreased supply Changes in the FOPChanges in the FOP

Wages increase= supply decreaseWages increase= supply decrease

Minimum Wage and Minimum Wage and EquilibriumEquilibrium

Unfortunately, the real minimum wage is Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is always zero, regardless of the laws, and that is the wage that many workers receive in the the wage that many workers receive in the wake of the creation or escalation of a wake of the creation or escalation of a government-mandated minimum wage, government-mandated minimum wage, because they lose their jobs or fail to find jobs because they lose their jobs or fail to find jobs when they enter the labor force. Making it when they enter the labor force. Making it illegal to pay less than a given amount does illegal to pay less than a given amount does not make a worker’s productivity worth that not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely amount—and, if it is not, that worker is unlikely to be employed. to be employed.

Surplus, Shortages, and Surplus, Shortages, and EquilibriumEquilibrium

Point of EquilibriumPoint of Equilibrium

Surpluses (excess Surpluses (excess supply)supply)

Shortages Shortages (excess demand)(excess demand)

ElasticityElasticity

Effect of the change in price on DemandEffect of the change in price on Demand Price InelasticPrice Inelastic

Price Price doesn’tdoesn’t affect demand affect demand Ex. WaterEx. Water Steeper CurveSteeper Curve

Price ElasticPrice Elastic Demand very sensitive to PriceDemand very sensitive to Price Flatter CurveFlatter Curve

Which of these is most Which of these is most elastic? Why?elastic? Why?

What real world event What real world event could cause this action?could cause this action?

What could cause this?What could cause this?

What real world event What real world event could cause this action?could cause this action?