Unit 2: Consumer
Choice, Demand, and
Supply
Lecture #1:
Introduction to Markets, Supply, and
Demand
The Circular Flows in a Market
Economy
The Circular Flows in a Market Economy
with Government
A Description of Production
Natural resources are transformed by human and
capital resources into goods and services.
Thus, human and capital resources do the work of
production, while natural resources provide the
material that they transform.
Because human and capital resources require energy
to work, natural resources also provide the energy
required for these resources (i.e., food for workers
and fuel for machines).
Productive Resources
Human resources
People: the mental and physical abilities
that allow them to make contributions in
the workforce.
Examples: construction workers, factory workers, teachers, doctors, truck drivers,
farmers, secretaries, actors, engineers, garbage collectors, and many other
occupations
Productive Resources
Capital resources
Goods that were specifically produced in
order to produce other goods.
Examples: machines, equipment, tools, office and factory buildings, tractors,
assembly lines, computers, grinders, trucks, and many other things that help in
the production process
Productive Resources
Natural resources
An actual or potential form of wealth
extracted or harvested from the natural
environment.
Examples: trees, fish, soil, minerals (such as copper, aluminum, iron ore, gold,
and zinc), air, water, fossil fuels (such as coal, oil, and natural gas), as well as
the space provided by a plot of land
The Role of Money
How would you obtain something you want without using
money?
Why is money an essential component of our production process?
Why Money?
1. Medium of Exchange:
•
used to determine the value during the exchange of goods
and services
•
alternative to barter
2. Unit of Account:
•
allows you to compare the value of goods and services
3. Store of Value:
•
keeps if you decide to hold on to it
Markets
• Institutions or mechanisms which bring together
buyers and sellers of particular goods, services, or
resources.
The Law of Demand
• States that there is an INVERSE relationship between price and
quantity demanded…
If Price increases, Quantity Demanded decreases…
P
Q
If Price decreases, Quantity Demanded increases…
P
Q
Law of Supply
• States that there is a direct relationship between quantity
supplied by producers and price…
If Price increases, Quantity Supplied increases…
P
Q
If Price decreases, Quantity Supplied decreases…
P
Q
Demand vs. Quantity Demanded
• Demand is the amount of a good and service that a consumer is
willing and able to buy at various possible prices during a given
time period.
• Quantity Demanded is the amount at each particular price a
consumer is willing and able to buy at during a given time period.
• How many will you buy at one specific price?
KNOW THE DIFFERENCE!!!!!
Supply vs. Quantity Supplied
• Supply represents the total amount of goods a
producer is willing and able to sell at various
possible prices during a given time period.
• Quantity Supplied refers to the amount of a
good that a producer is willing and able to sell at
a particular price during a given time period.
Representing Quantity Demanded
• Demand Schedules – table that shows the
relationship between demand and price of a given
product
• Demand Curves – graph where the x-axis
represents the quantity demanded from a given
product and the y-axis represents various prices
Demand Curves slope DOWNWARD
The Demand Schedule…
The Demand Curve…
DOWNWARD SLOPING!!!!
(p)
P
r
i
c
e
Quantity Demanded
(q)
Catherine’s Demand Schedule
Figure 1 Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright © 2004 South-Western
Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax that raises
the price of icecream cones
results in a
movement along
the demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
MARKET VS. INDIVIDUAL
DEMAND
• Each consumer has his individual demand curve for
a product
• The market demand curve for that product is the
sum of all of the individual demand curves
Representing Quantity Supplied
• Supply Schedule (same idea as demand schedule) –
shows the relationship between price and quantity
supplied
• Supply Curve – Price is ALWAYS on Y-Axis &
Quantity supplied on X-Axis
• graph slopes upward (positive)
Supply Curve
(p)
UPWARD SLOPING
P
r
i
c
e
Quantity Supplied
(q)
Ben’s Supply Schedule
Supplied
Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
Supplied
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning
Change in Quantity Supplied
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
MARKET SUPPLY VS.
INDIVIDUAL SUPPLY
• Each producer has his own individual supply curve
• The market supply curve is the sum of all the
individual supply curves