Chapter 3 Demand and Supply S Price D Quantity

Bell Work 10/7/13 Topic: Household 1) When you spend money, where do you spend it? List at least 3 things. 2) Think of the sources of income in your household. Where does your household income come from? (Paychecks for jobs; checks from government; interest earned on savings; dividends (money) earned from stocks; gifts; money earned from chores; etc.)

With a partner Look at your lists. What do your answers to number 1 have in common with each other? What do your answers to number 2 have in common with each other? Write these down on one sheet of paper under the headings “#1 in common”, and “#2 in common”.

Bell Work 10/8/13 Topic: Shutdown Has the government shutdown affected you or anyone you know? If so, how? Government Shutdown History Lesson (Newsy) 2 minute video

Fundamental Decision-Making Units in the Economy: Firms and Households

Household The primary consuming unit in a market economy = consumers The individual, family, or group that buys products & services and works for the company.

Firm An organization that transforms (makes) resources into products Firms are the primary producing units in a market economy = businesses or companies.

Understanding Demand & Supply Economic Activity flows in circular motion Households demand goods and services and supply labor, $ and land Firms demand labor, $, and land and supply goods and services

The Circular Flow A circular flow diagram describes the interaction of firms and households in markets for outputs and inputs. This interaction = The market

Which of the following is the primary consuming unit in the economy? Households Firms Businesses Government  Christopher Productions 2008

Which of the following is the primary consuming unit in the economy? Households Firms Businesses Government  Christopher Productions 2008

Output markets: markets in which goods and services are exchanged. Supply Output/Product Markets Goods Services Demand House holds Firms

Input/Factor Markets: Capital (profit, interest) Input markets: markets in which the resources used to produce products are exchanged. House holds Firms Input/Factor Markets: Labor (wages) Capital (profit, interest) Land (rent) Demand Supply

Input/Factor Markets: Capital (profit, interest) The Circular Flow Supply Output/Product Markets: Goods Services Demand House holds Firms Input/Factor Markets: Labor (wages) Capital (profit, interest) Land (rent) Demand Supply

Circular Flow Explained http://www.youtube.com/watch?v=_PKH2wtDT3E&safe=active (12:37)

Bell Work 10/9/13 Interaction In your own words, explain the interaction between firms & households in a market economy.

To understand how markets work to determine prices: We will build a theory of demand which explains how households determine which goods and services they will purchase at various price levels.

To understand how markets work to determine prices: We will build a theory of supply which describes how firms make decisions on how much of a product or service to produce or provide at various price levels.

Output markets: Supply and Demand Market for Goods. Output/Product Markets Goods Services Demand House holds Firms D S Price Quantity

The willingness and ability Definition of Demand The willingness and ability to purchase a good at various price levels.

Quantity Demanded The number of units (quantity) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Demand in Output Markets A household’s decision about what quantity of a product to demand depends on a number of factors… such as income, wealth and personal preferences of that household.

Demonstration

Principle of Diminishing Marginal Utility The more you consume of an item the less satisfaction you get from that additional consumption. i.e. a candy bar We call the satisfaction or use you get from a product Utility

Diminishing Marginal Utility http://www.youtube.com/watch?v=j2_xmMW1W9A (Start at 0:21)

Does the second candy bar (marshmallow, etc Does the second candy bar (marshmallow, etc.) taste as good as the first? Why or why not? Can you think of goods or services that don’t lose value as you consume more of them? How does diminishing marginal utility impact our willingness and ability to purchase goods and services?

 Christopher Productions 2008 The definition of demand includes the willingness & _____ to purchase a good at various price levels? Want Ability Supply Desire Government’s permission  Christopher Productions 2008

 Christopher Productions 2008 The definition of demand includes the willingness & _____ to purchase a good at various price levels? Want Ability Supply Desire Government’s permission  Christopher Productions 2008

Demand Demand Comparison Chart: My Demand vs. Market Demand

Bell Work 10/10/13 Pretend that you work for Nintendo as a video game designer. How will you find out if a new game you are working on will sell? How will you know how many to produce? How will you know what the price should be?

The Law of Demand There is a negative, or inverse, relationship between the quantity of a good demanded and its price. The higher the price the less we will buy or purchase a product! This means that demand curves typically have a negative slope.

Graphing: A How to Guide How to read and understand graphs

A graph is a two-dimensional representation of a set of numbers or data. X 1 2 3 4 5 Y 6 8 10 12 Y X 5

Many graphs in economics are shown on a Cartesian coordinate system. Y-axis X negative y positive X positive y positive 2 1 X-axis 3 4 ORIGIN X negative y negative X positive y negative

Any combination of values of X and Y can be plotted in this space. For example, point A represents Y = 5 when X = 3. 5 3

We mainly operate in the 1st quadrant Y-axis 4 3 2 1 X positive y positive 1 X-axis 1 2 3 4

The slope of an upward-sloping line is positive. This is called a…. ↓ X 1 2 3 4 5 Y 6 8 10 12 Y Direct Relationship X 5

For example... Suppose x represents hours spent studying and y represents your grade on your next economics quiz. Suppose there is a maximum of 12 points available on the quiz.

This means that each hour spent studying earns you 2 points on the quiz. 1 2 3 4 5 quiz score 2 4 6 8 10 12 quiz score 5 study hours

The slope of the line is the change in the quiz score for an additional hour of study time, which is 2 points. study hours 1 2 3 4 5 quiz score 2 4 6 8 10 12 quiz score 2 points 1 hour 5 study hours

Other Examples? Positive or Direct Relationships? Think of another example & write it down in your notes.

The slope of a downward-sloping line is negative. This is an….. ↓ X 1 2 3 4 5 Y 20 16 12 8 Y Inverse Relationship X 5

For example, hours of exercise & weight. As hours of exercise increases, weight decreases. (Example is exaggerated) Hrs. of Exercise Weight 2 170 6 160 10 150 14 140

Some precautions...when you read a graph Make sure you know what variables are on the axes. Pay attention to the scale used to measure the variables on the axes.

Compare these two graphs Do they represent the same data? Price Price $4 $400 $300 $200 $100 $3 No they do NOT different scale on Y axis $2 $1 10 20 30 40 50 10 20 30 40 50 Quantity demanded Quantity demanded

Compare these two graphs Do they represent the same data? Price Price $4 Yes they DO different scale on Y axis but same data used $20 $3 $15 $2 $10 $1 $5 $1 10 20 30 40 50 10 20 30 40 50 Quantity demanded Quantity demanded

P & Q have a Negative Slope Price D Quantity demanded

Cheeseburgers

…a specified time period …other things being equal DEMAND SCHEDULE P QD Various Amounts $5 4 3 2 1 10 20 35 55 80 A Series of Possible Prices …a specified time period …other things being equal

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Cheeseburgers P $5 4 3 2 1 Burgers Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Cheeseburgers P $5 4 3 2 1 Burgers Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 55 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Cheeseburgers P $5 4 3 2 1 Burgers Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q 35 Quantity of Cheeseburgers

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Cheeseburgers P $5 4 3 2 1 Burgers Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q Price of Cheeseburgers P $5 4 3 2 1 Burgers Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

GRAPHING DEMAND Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 P D Price of Cheeseburgers P $5 4 3 2 1 Burgers Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 D o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

Changes in Quantity Demanded vs. Changes in Demand: IMPORTANT DISTINCTION ! Changes in Price implies changes in Quantity Demanded which is a movement along a demand curve. Changes in Demand imply a shift in the entire demand curve.

Factors that ↑ Demand The Income effect: As you increase your income - you ability and willing- ness to purchase goods (demand)

Increase in Demand (Caused by ↑ Income) Price of Cheeseburgers P $5 4 3 2 1 Burgers P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 + Increase in Demand D2 D1 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

Increasing Quantity Demanded Increase in Quantity Demanded caused by decrease in price Price of Cheeseburgers P $5 4 3 2 1 Burgers P QD $5 4 3 2 1 10 20 35 55 80 D1 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

GRAPHING DEMAND P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60 P Price of Cheeseburgers P $5 4 3 2 1 Burgers P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60 Decrease in Demand D1 D2 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

GRAPHING DEMAND Decrease in Quantity Demanded P QD $5 4 3 2 1 10 20 35 Price of Cheeseburgers P Decrease in Quantity Demanded $5 4 3 2 1 Burgers P QD $5 4 3 2 1 10 20 35 55 80 D1 o 10 20 30 40 50 60 70 80 Q Quantity of Cheeseburgers

What is the slope of a demand curve? Negative Positive Upward Indeterminate Both B and C  Christopher Productions 2008  Christopher Productions 2008

What is the slope of a demand curve? Negative Positive Upward Indeterminate Both B and C

Normal Good Goods for which demand goes up when income is higher and for which demand goes down when income is lower Example: luxury cars steak

Goods for which demand falls when income rises Inferior Goods Goods for which demand falls when income rises Example: mac-n-cheese Ramen noodles But I love mac-n-cheese! (becomes side dish with more income)

Inferior Goods Goods for which demand falls when income rises or demand rises when income falls. Example: hot dogs/bologna public transportation

Can you name other inferior goods than those listed? What is the distinction between and inferior good and a “cheap” good? With the state of the economy today are inferior goods becoming more popular?

Determinants of Change in Household Demand: INCOME available an increase in income = increase in demand if you get a new job that pays higher decrease in income = decrease in demand you get laid off D2 D1 P Q D1 D2 P Q

 Christopher Productions 2008 What do we call a good that we demand more of the good as our income falls? Complementary Substitution Normal Inferior Cheap  Christopher Productions 2008

 Christopher Productions 2008 What do we call a good that we demand more of the good as our income falls? Complementary Substitution Normal Inferior Cheap  Christopher Productions 2008

Determinants of Change in Household Demand: INCOME available TASTES AND PREFERENCES Advertising – “Madison Avenue” Blue jeans

Jeaning of America

Determinants of Change in Household Demand: X TASTES AND PREFERENCES Advertising Research/fads Fish is brain food? What if: Fish causes cancer

Determinants of Change in Household Demand: INCOME available TASTES AND PREFERENCES EXPECTATIONS with respect to future income, wealth, and prices If you expect the economy to go bad, do you spend money? If you expect to graduate college & get a job, do spend money?

Determinants of Change in Household Demand: INCOME available TASTES AND PREFERENCES EXPECTATIONS with respect to future income, wealth, and prices Price of substitution good

Substitutes Goods that can serve as replacements for one another; When the price of one increases, demand for the other goes up This effect also applies to a change in popularity of one good over another

Substitutes Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up i.e. Pizza and ?

Substitutes Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up i.e. Pizza and Cheeseburgers

Substitutes Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up Perfect substitutes are identical products. i.e. gasoline

Determinants of Change in Household Demand: INCOME available TASTES AND PREFERENCES EXPECTATIONS with respect to future income, wealth, and prices Price of substitution good Price of complementary good