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%.