1. Chapter 3
Demand and Supply S
Price D
Quantity

2. 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.)

3. 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”.

4. 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

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

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

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

8. 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

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

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

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

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

13. 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

14. 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

15. Circular Flow Explained
(12:37)

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

17. 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.

18. 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.

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

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

21. 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.

22. 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.

23. Demonstration

24. 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

25. Diminishing Marginal Utility
(Start at 0:21)

26. 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?

27.  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

28.  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

29. Demand
Demand Comparison Chart:
My Demand vs. Market Demand

30. 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?

31. 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.

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

33. 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

34. 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

35. 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

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

37. 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

38. 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.

39. 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

40. 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

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

42. 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

43. For example, hours of exercise & weight.
As hours of exercise increases, weight decreases. (Example is exaggerated)
Hrs. of Exercise Weight

44. 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.

45. 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

46. 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

47. P & Q have a Negative Slope
Price D
Quantity demanded

48. Cheeseburgers

49. …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

50. 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 Q
Quantity of Cheeseburgers

51. 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 Q
Quantity of Cheeseburgers

52. 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 Q 35
Quantity of Cheeseburgers

53. 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 Q
Quantity of Cheeseburgers

54. 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 Q
Quantity of Cheeseburgers

55. 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 Q
Quantity of Cheeseburgers

56. 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.

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

58. 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 Q
Quantity of Cheeseburgers

59. 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 Q
Quantity of Cheeseburgers

60. 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 Q
Quantity of Cheeseburgers

61. 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 Q
Quantity of Cheeseburgers

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

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

64. 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

65. 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)

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

67. 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?

68. 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

69.  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

70.  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

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

72. Jeaning of America

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

74. 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?

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

76. 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

77. 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 ?

78. 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

79. 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

80. 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