Today z3 questions for every society zBegin Demand.
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Transcript of Today z3 questions for every society zBegin 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.
The Role of Gov’t in the U.S. Includes:
providing legal structure/property rights/criminal prosecution
public defense (military)printing moneysafety regulationspostal serviceschoolsincome redistribution/social safety net
In Some Other Countries, also:
provision of some industries (ex.: auto, mining)
management of firmswage/price controls
Property Rights & Incentives
People will not work & produce unless they benefit from it.
Profit motive: leads firms to produceProperty 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.
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 cheeseHousehold incomePrice of other goods related in demandTastes/PreferencesInformation/ExpectationsPopulation/demographics of the
market
Ceteris Paribus
. . . Holding all else constantEconomists 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 Quantity $1 400 $2 300 $3 200 $4 100
The Law of Demand
As the price of a good falls, its quantity demanded by the market will rise, ceteris paribus.
The Demand Curve
Demand Curve: The demand curve tells us how much will be demanded at every possible price, ceteris paribus.
It is a graph of the demand schedule.
The Demand Curve
Only P changes as we move along this demand curve.
(Ceteris Paribus)
Quantity(lb.per week)
Price($/lb.)
4
3
2
1
00 100 200 300 400
D
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”.
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
The quantity demanded is higher at every possible price.
Shifts rightward.
Price($/lb.)
4
3
2
1
00 100 200 300 400
D
D’
D
Decrease in Demand
The quantity demanded is lower at every possible price.
Shifts leftward.
Price($/lb.)
4
3
2
1
00 100 200 300 400
DD’
Shifts in Demand
A Change in Average Household Income
A Change in the Price of Another Good
A Change in Tastes or PreferencesA Change in Consumer ExpectationsA Change in Demographics
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