Chapter 3 Demand and Supply

Circular Flow Model  What things flow from each sector of the economy?  From Firms?  From Households?

Demand  Willingness/ Ability to buy at a certain price.  Law of Demand  Demand Schedule  Demand Curve

Demand VS. Q demanded  Price change for Good A causes:  Movement along demand curve for good A.  Does NOT change Demand  Change in any of the 5 Determinants of Demand.  Demand curve SHIFTS.

Determinants of Demand (Shift in Curve)  Tastes  Income  Income Rise= Demand Rise  Price of related products  Substitute goods  Hot Dogs vs. Hamburgers  Complementary goods  Products used with each other  Cars and Gas (SUV’s)  Number of Potential Customers  Future Expectations

The Law of Supply  Supply  # of units firm is willing to sell  Diminishing returns  Cost of producing additional items increases  Law of supply  Higher prices = higher quantity supplied

Changes in Supply  Costs of Production  Increased cost = decreased supply  Changes in the FOP  Wages increase= supply decrease  Technology Improvements  Taxation (corp)  Regulation  Labor Laws  Currency (Import costs)  Unexpected events

Surplus, Shortages, and Equilibrium  Point of Equilibrium

Surpluses (excess supply)

Shortages (excess demand)

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

Elasticity  Effect of the change in price on Demand  Price Inelastic  Price doesn’t affect demand  Ex. Water  Steeper Curve  Price Elastic  Demand very sensitive to Price  Flatter Curve

Which of these is most elastic? Why?

What real world event could cause this action?

What could cause this?

What real world event could cause this action?