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Today

Explore the three essential questions that every society must answer when it comes to their economy. Discover how different economic systems, such as market economies and centrally-planned economies, address these questions. Learn about the role of government in the economy, including the provision of public goods and the importance of property rights and incentives. Finally, delve into the concepts of demand and supply, and understand how shifts in demand can impact the market.

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Today

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  1. Today • 3 questions for every society • Begin Demand

  2. 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.

  3. 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.

  4. Market Economy, Cont’d. • Who gets it is determined by how much income each household gets. • In a market economy, prices coordinate economic activity!

  5. Centrally-Planned Economy • Gov’t bureaucrats make these decisions using complex problem-solving skills.

  6. Mixed Economies • Some activity coordinated by prices, some by bureaucrats

  7. 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

  8. In Some Other Countries, also: • provision of some industries (ex.: auto, mining) • management of firms • wage/price controls

  9. 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).

  10. 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.

  11. Chapter 3 Demand & Supply

  12. The Market for Cheese

  13. The Demand for Cheese • Quantity Demanded: The number of pounds of cheese that buyers are willing & able to buy each week in Richmond. • (QD)

  14. 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

  15. Ceteris Paribus • . . . Holding all else constant • Economists focus on how QD responds to changes in price, ceteris paribus.

  16. The Demand Schedule • . . . is a table that shows how QD and P are related. • Price Quantity • $1 400 • $2 300 • $3 200 • $4 100

  17. The Law of Demand • As the price of a good falls, its quantity demanded by the market will rise, ceteris paribus.

  18. 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.

  19. The Demand Curve Price ($/lb.) • Only P changes as we move along this demand curve. • (Ceteris Paribus) 4 3 2 1 D 0 Quantity (lb.per week) 100 200 300 0 400

  20. 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”.

  21. The Law of Demand, Redux • Demand curves must slope downwards!

  22. Shifts in Demand • Changes in other factors affecting demand will shift the demand curve. • Called a “change in the demand for cheese”.

  23. D Increase in Demand Price ($/lb.) • The quantity demanded is higher at every possible price. • Shifts rightward. 4 3 2 D’ 1 D 0 100 200 300 0 400

  24. D’ D Decrease in Demand Price ($/lb.) • The quantity demanded is lower at every possible price. • Shifts leftward. 4 3 2 1 0 100 200 300 0 400

  25. Shifts in Demand • A Change in Average Household Income • A Change in the Price of Another Good • A Change in Tastes or Preferences • A Change in Consumer Expectations • A Change in Demographics

  26. Coming Up: • Next Time • Detailed look at shifts in demand • Study supply

  27. 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”.

  28. 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

  29. 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%.

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