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CHAPTER FOCUS
SECTION 1 Demand
SECTION 2 The Demand Curve and
Elasticity of Demand
SECTION 3 The Law of Supply and
the Supply Curve
SECTION 4 Putting Supply and
Demand Together
CHAPTER SUMMARY
CHAPTER ASSESSMENT
3
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Why It’s Important
Why do some CDs cost more than
others? Why does the price of video
rentals go down when another video store
opens in the neighborhood? This chapter
will explain the relationship between
demand and supply –and how this
relationship determines the prices
you pay.
Click the Speaker button to
listen to Why It’s Important.
4
Chapter Overview
Consumers base their decisions to buy
goods and services on anticipated
satisfaction, price, and their incomes.
Businesses set prices according to the
profit desired, the demand anticipated,
and the competition expected. Chapter 7
discusses the laws of supply and demand
and the ways in which a voluntary market
affects them.
5
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Reader’s Guide
Section Overview
Section 1 explains or describes the principle of
voluntary exchange as it applies to a market
economy and how the real income effect, the
substitution effect, and diminishing marginal utility
each alter quantity demanded. 
Objectives
– How does the principle of voluntary exchange
operate in a market economy? 
– What does the law of demand state? 
– How do the real income effect, the substitution
effect, and diminishing marginal utility relate to
the law of demand?
7
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information. Section 1 begins on page 169 of your textbook.
Reader’s Guide (cont.)
Terms to Know
– demand 
– utility 
– supply 
– marginal utility 
– market 
– law of diminishing
marginal utility
– voluntary exchange 
– law of demand 
– quantity demanded 
– real income effect 
– substitution effect 
Click the Speaker button to
listen to the Cover Story.
8
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information. Section 1 begins on page 169 of your textbook.
Introduction
• The word demand has a special meaning
in economics. 
• As you read this section, you’ll learn that
demand includes only those people who
are willing and able to pay for product or
service.
9
Lecture Launcher
• Procter & Gamble introduced disposable
diapers to the marketplace in 1961. At
first parents only used Pampers for
special occasions. Today, 95% of
American parents use disposable diapers
at a cost of about $2,100 a child. 
• Why do you think the change took place
gradually? 
• How are the concepts of marketplace
and voluntary exchange linked to the
Laws of Demand?
10
The “Marketplace”
• Consumers influence the price of goods
in a market economy. 
• Demand is how people decide what to
buy and at what price. 
• Supply is how sellers decide how much to
sell and what to charge. 
• A market represents actions between
buyers and sellers.
11
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Discussion Question
Describe two different types of
marketplaces in which you shop.
Possible response: I buy things at
the mall where the seller and the
buyer meet face to face. I also order
products on the Internet—the buyer
and seller only communicate via
computer.
12
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to display the answer.
Voluntary Exchange
• The seller sets the price. 
• The buyer agrees to the product and price
through the act of purchasing product. 
• Supply and demand analysis is a model of
how buyers and sellers behave in the
marketplace.
13
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Discussion Question
Suppose that the buyer does not
agree to the product and price.
Other than change the price, how
can the seller convince the buyer to
agree to the price?
The seller can change the product a
little so that customer is more
satisfied. The seller can market the
product in such a way as to create a
perceived need that the customer did
not see before.
14
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to display the answer.
The Law of Demand
• Demand is created only when the
customer is both willing and able to buy
product. 
• As price goes up, quantity demanded
goes down. As price goes down, quantity
demanded goes up. 
• Real income effect is when people are
limited by their income as to what they
can purchase.
15
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The Law of Demand
• Substitution effect is when people can
replace one product with another if it
satisfies the same need. 
• Utility is the ability of any good or service
to satisfy consumer wants. 
• People will purchase additional items until
the satisfaction from the last unit is equal
to the price. 
• The lessening of this satisfaction with
each additional purchase is called
diminishing marginal unity.
16
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Discussion Question
What are some reasons that people
substitute one product for another?
What are some reasons that people
continue to buy a product despite
its price?
17
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Discussion Question
They substitute because the price of
one product rises and it doesn’t seem
worth the rise in price or the person’s
income decreases and they can’t
afford the product. The continue
buying the product because their
income is high enough that they can
still afford it, or the product has a
quality that the person is unwilling to
give up regardless of the price.
18
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Section Assessment
How does the principle of voluntary
exchange operate in a market
economy?
Buyers and sellers work out their own
terms of exchange.
19
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to display the answer.
Section Assessment (cont.)
What is the law of demand?
The law of demand states that there
is an inverse relationship between
quantity demanded and price.
20
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Section Assessment (cont.)
Making Predictions Imagine that
you sell popcorn at the local
football stadium. Knowing about
diminishing marginal utility, how
would you price your popcorn after
half-time?
The price of popcorn could be
reduced after half-time.
21
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to display the answer.
Section Close
Write an example from personal
experience of how price, real
income, or the substitution effect
changed your decision to buy a
good or service.
22
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Reader’s Guide
Section Overview
Section 2 explains or describes graphing the
demand curve, what factors determine demand,
and elastic and inelastic demand. 
Objectives
– What does a demand curve show? 
– What are the determinants of demand? 
– How does the elasticity of demand affect the
price of a given product?
24
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information. Section 2 begins on page 177 of your textbook.
Reader’s Guide (cont.)
Terms to Know
– demand schedule 
– demand curve 
– complementary good 
– elasticity 
– price elasticity of demand 
– elastic demand 
– inelastic demand
Click the Speaker button to
listen to the Cover Story.
25
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information. Section 2 begins on page 177 of your textbook.
Introduction
• Quantity demanded is based on price. 
• When demand is low, usually prices are
lower. 
• Then as more people want a particular
product or service (increased demand)
prices generally rise. 
• This section explains or describes
graphing the demand curve, what factors
determine demand, and elastic and
inelastic demand.
26
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Lecture Launcher
• Vending machines of the future will have
variable pricing. On a winter day, a soda
may cost only 50 cents, but on a summer
day it may cost $1.00. 
• What other variables might increase, or
decrease, the demand for soda?
27
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to display the information.
Graphing the Demand Curve
• A demand schedule is a table of prices
and the quantity demanded at each
price. 
• List quantity demanded at different prices 
• A demand curve graphs the quantity
demanded of a good or service at each
possible price.
28
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Discussion Question
Why do you think graphing the
demand curve would be useful to
businesses?
By having a graph that expresses all
the possible prices and quantity
demanded, a business can better
predict its financial future.
29
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to display the answer.
Graphing the Demand Curve (cont.)
Figure 7.4 Part A
Demand Schedule
The numbers in the
demand schedule to
the right show that as
the price per CD
decreases, the
quantity demanded
increases. Note that at
$16 each, a quantity
of 500 million CDs will
be demanded.
Graphing the Demand Curve (cont.)
Figure 7.4 Part B
Plotting the Price–
Quantity Pairs
Note how the price and
quantity demanded
numbers in the demand
schedule have been
transferred to the graph
on the right. Find letter
E. Note that it
represents a number of
CDs demanded (500
million) at a specific
price ($16).
Graphing the Demand Curve (cont.)
Figure 7.4 Part C
Demand Curve
for CDs
The points in the
previous graph have
been connected with a
line in the chart to the
right. This line is the
demand curve, which
always falls from left to
right. How many CDs
will be demanded at a
price of $12 each?
Quantity Demanded vs. Demand
• A change in quantity demanded is
caused by a change in the price of a
good. 
• If something other than price causes
demand to increase or decrease, this is
known as a change in demand and shifts
the demand curve.
33
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Discussion Question
Think of some factors or events
other than price that can cause
demand as a whole to increase or
decrease?
Give examples of such a factor or
event.
34
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to display the answer.
Discussion Question
Changes in the environment or
political climate can cause demand to
increase. For example, if there is a
blizzard the overall demand for snow
shovels will probably increase. If a
large scale war suddenly ends, the
demand for weapons will decrease.
35
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to display the answer.
Determinants of Demand
• Population 
• When population
Figure 7.5 Part A
increases,
Change in Demand if Population
opportunities to buy Increases
and sell increase. The
demand curve
labeled D1
represents demand
before the population
increased. The
demand curve
labeled D2
represents demand
after the population
increased.
36
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Determinants of Demand (cont.)
• Income 
• The demand curve D1
represents CD demand
before income
decreased. The demand
curve D2 represents CD
demand after income
decreased. If your
income goes up,
however, you may buy
more CDs at all possible
prices, which would shift
the demand curve to the
right.
37
Figure 7.5 Part B
Change in Demand if
Your Income Decreases
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Determinants of Demand (cont.)
• Tastes and preferences, including fads 
• When a product
becomes a fad, more
of it is demanded at
all prices, and the
entire demand curve
shifts to the right.
Notice how D1–
representing demand for
Beanie Babies™ before
they became popular–
becomes D2– demand
after they became a fad.
38
Figure 7.5 Part C
Change in Demand
if an Item Becomes a Fad
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Determinants of Demand (cont.)
• Substitutes are when a new competitor is
added or an old competitor leaves the
Figure 7.5 Part D
market. 
Change in Demand
for Substitutes
• As the price of the
substitute (margarine)
decreases, the
demand for the item
under study (butter)
also decreases. If, in
contrast, the price of
the substitute
(margarine) increases,
the demand for the
item under study
(butter) also increases.
39
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Determinants of Demand (cont.)
• Complementary goods are products that
rely upon one another, demand for one
affects demand for the other.
Figure 7.5 Part E
Change in Demand
for Complementary Goods
40
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Discussion Question
For products that fill the three basic
needs (food, clothing, and shelter),
which determinant(s) of demand
would be the most significant and
why?
Substitutes and/or income should be
the most significant determinants.
Income will affect how much a person
can afford to spend on any one item
of clothing or meal. Substitutes make
it possible for the consumer to
choose a different item to meet the
need.
41
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The Price Elasticity of Demand
• How much consumers respond to a
given change in price is elasticity. 
• Elastic demand occurs when the demand
for some goods is greatly affected by the
price. 
• Inelastic demand occurs when the
demand for some goods is less affected
by price.
42
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The Price Elasticity of Demand (cont.)
• How many substitutes exist and how closely
they provide the same quality and service
affects elasticity of demand (fewer or no
substitutes make demand inelastic). 
• Percent of a personal budget spent on
that item affects elasticity of demand (the
higher the percent of budget, the more
elastic the demand. 
• How much time consumers have to
adjust to the new price affects elasticity
of demand (more time makes for greater
elasticity).
43
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The Price Elasticity of Demand (cont.)
Figure 7.6
Elasticity of Demand
Curve A at the price of
$5.50 could represent
the inelastic demand for
pepper. Even if the price
of pepper dropped
dramatically, you would
not purchase much
more of it. Curve B at
$5.50 could represent
the elastic demand for
steaks. If the price drops just a little, many
people will buy much more steak.
Discussion Question
Do you think it is in a company’s
best interest to drastically change
the price of a popular product and
give consumers months to buy the
product at the new price?
Why or why not?
45
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Discussion Question
It depends upon the type of product
and whether or not the price was
increased or decreased. If it is a
product with elastic demand and the
price is decreased then the longer
time at the lower price will mean
more buyers. However, if the price is
increased, the longer time period will
give people time to find other optionssubstitutes, doing without, etc.
46
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Section Assessment
What does a demand curve show?
A demand curve shows the number
of items that will be demanded at
every given price.
47
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Section Assessment (cont.)
How does the elasticity of demand
affect the price for a given product?
A product with elastic demand is
likely to be priced lower because
consumers can switch among the
various substitutes.
48
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to display the answer.
Section Close
List goods and services that have
elastic, moderately elastic, and
inelastic demands in your
household. Create a chart, noting
whether the demand for each item
responds to changes in price,
income, quality, need, available
substitutes, time adjustments, or
taste.
49
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Reader’s Guide
Section Overview
Section 3 explains or describes how the incentive
of greater profit–including the law of diminishing
returns–affects supply and what the supply curve
shows. 
Objectives
– What is the law of supply? 
– How does the incentive of greater profits
affect quantity supplied? 
– What do a supply schedule and supply curve
show? 
– What are the four determinants of supply?
51
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information. Section 3 begins on page 186 of your textbook.
Reader’s Guide (cont.)
Terms to Know
– law of supply 
– quantity supplied 
– supply schedule 
– supply curve 
– technology 
– law of diminishing returns
Click the Speaker button to
listen to the Cover Story.
52
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information. Section 3 begins on page 186 of your textbook.
Introduction
• Consumers demand products and
services at the lowest possible prices. 
• In contrast, suppliers exist to make a
profit.
• As you read this section, you’ll learn about
the law of supply and how it is geared
toward making profits.
53
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Lecture Launcher
• In the early days of the telephone,
human operators had to physically
connect each call. The phone companies
thought that they would always have
enough operators to do the job. As the
telephone became increasingly popular,
what happened to the cost of labor for
operations? 
• About what percentage of your calls
involves contact with a telephone
operator?
54
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Lecture Launcher (cont.)
• Why were telephone companies willing to
supply more automated methods of
connecting telephone calls?
55
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The Law of Supply
• Supply is the willingness and ability of
producers to provide goods to the
consumer. 
• As prices rise, the quantity supplied
generally rises. 
• As prices fall, the quantity supplied falls. 
• A direct relationship exists between price
and quantity supplied.
56
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Section Assessment
What would happen to the price of
computer chips if a company
opened a new chip manufacturing
plant that produced billions of
chips?
The price of chips would fall because
the supply would exceed demand.
57
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The Incentive of Greater Profits
• Increase in price and increase in production
leads to an increase in profits. 
• Higher prices encourage more
competitors to join the market. 
• Higher prices turn potential suppliers into
actual suppliers, adding to the total
output.
58
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Discussion Question
Why do higher prices encourage
more competitors to enter an
industry? 
Explain your answer in terms of risk
and profit.
If the prices go up, possible
competitors now see that there is
more money to be made than before.
The gain seems more worth the risk
than it did before.
59
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The Supply Curve
• Graphs and tables can explain the law of
supply. 
Figure 7.8 Part A Supply Schedule
• A supply
schedule shows
the quantity
supplied at each
given price.
60
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The Supply Curve (cont.)
• A supply curve graphs the quantities
supplied at each possible price.
Figure 7.8 Part B
Plotting Quantity Supplied
61
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The Supply Curve (cont.)
• The relationship between quantity and
price is direct and always moving in the
same direction.
Figure 7.8 Part C Supply Curve
62
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Discussion Question
Do you think graphs and tables are
good visual indicators of supply?
Answers will vary. Students should
discuss how by visually measuring
supply in a graph, it is easier to see
how the supply curve moves and
affects the economy.
63
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Quantity Supplied vs. Supply
• A change in quantity supplied is caused by
a change in price. 
• Something other than price can cause a
change in supply as a whole to increase
or decrease.
64
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Discussion Question
When something other than price
causes the supply to increase, what
do you think happens to price?
Explain why?
The price will decrease because the
supply will be too great.
65
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The Determinants of Supply
• The price of
inputs, or the
cost of
production—
raw
materials,
wages,
insurance,
utilities, etc.
—can cause
increase in
supply.
66
Figure 7.9 Part A
Change in Supply if Price of Inputs
Drops
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The Determinants of Supply (cont.)
• Competition, or the number of companies
in an industry, can cause an increase in
supply.
Figure 7.9 Part B
Change in Supply if Number of Firms
Increases
67
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The Determinants of Supply (cont.)
• An increase in taxes can cause a
decrease in supply.
Figure 7.9 Part C
Change in Supply if Taxes Increase
68
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The Determinants of Supply (cont.)
• An improvement
in technology, or
the science used
to develop new
products or
methods of
production and
distribution, can
cause an
increase in
supply.
69
Figure 7.9 Part D
Change in Supply if
Technology Reduces
Costs of Production
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Discussion Question
Give specific examples of inputs
(production costs) for a video store.
Cost of videos; wages for employees;
insurance for building and workers;
phones, electricity, heat, and air
conditioning for the building; cost of
candy and soda to sell
70
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to display the answer.
The Law of Diminishing Returns
• Adding units to increase production
increases total output for a limited time
period. 
• The extra output for each additional unit
will eventually decrease. 
• Businesses will continue to add units of a
factor of production until doing so no
longer increases revenue.
71
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Discussion Question
What are some different ways that
factors of production can be
increased? 
Choose one of you examples to
explain the law of diminishing
returns.
72
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Discussion Question
More employees can be hired, more
raw materials can be purchased,
more machines can be bought to
make the product, more stores can
be built, etc. If a company continues
to build toy stores, they will increase
profits. However, at some point the
amount of money spent to build and
maintain the new stores will not bring
in enough extra profit to warrant the
increased expenditure.
73
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to display the answer.
Section Assessment
What does the law of supply state?
The law of supply states that as the
price of a product rises, the quantity
supplied rises. As the price falls, the
quantity supplied also falls.
74
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Section Assessment (cont.)
How does the incentive of greater
profits affect supply?
Higher profits cause suppliers to
produce more.
75
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Section Assessment (cont.)
Supply List at least 10 costs of
production if you were to produce
and distribute baseball caps to local
stores.
Costs of production may include: price
of machines to make baseball caps,
price of materials used in baseball caps,
price of packaging materials, price of
transportation to distribute baseball
caps, rent payments for offices and
factories, advertising costs, employee
wages, taxes, and insurance.
76
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Section Close
Discuss how supply helps to shape
profits and employment in a market
economy.
77
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Reader’s Guide
Section Overview
Section 4 explains or describes equilibrium price,
shifts in equilibrium price, and how surpluses and
shortages affect price. 
Objectives
– How is the equilibrium price determined? 
– How do shifts in equilibrium price occur? 
– How do shortages and surpluses affect price? 
– How do price ceilings and price floors restrict
the free exchange of prices?
79
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information. Section 4 begins on page 194 of your textbook.
Reader’s Guide (cont.)
Terms to Know
– equilibrium price 
– shortage 
– surplus 
– price ceiling 
– rationing 
– black market 
– price floor
Click the Speaker button to
listen to the Cover Story.
80
Click the mouse button or press the Space Bar to display the
information. Section 4 begins on page 194 of your textbook.
Introduction
• Shortages occur when the quantity
demanded is larger than the quantity
supplied at the current price. 
• This section explains or describes
equilibrium price, shifts in equilibrium
price, and how surpluses and shortages
affect price.
81
Lecture Launcher
• Too manufacturers rarely charge the
equilibrium price for the season’s hottest
toy. What is the short-term result when
demand exceeds supply?
82
Equilibrium Price
• In the real world, demand and supply
work together. 
• The price at which the supply meets the
demand—where the two curves
intersect—is the equilibrium price.
83
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Equilibrium Price (cont.)
Figure 7.11
Equilibrium Price
How does the market reach an
equilibrium price? We start on
Day 1 with sellers thinking that the
price for CDs will be $20. If you
examine the supply schedule and
curve, you see that suppliers will
produce 1,100 units. However,
buyers will purchase only 100
CDs. The 1,000 unit surplus is
shown in column four of the
demand and supply schedule as
the difference between the
quantity supplied and the quantity
demanded at $20. To get rid of the
surplus, sellers will lower the price.
Equilibrium Price (cont.)
Figure 7.11
Equilibrium Price
Say suppliers lower the
price to $10. At that price,
they are willing to supply
100 CDs. However, as the
schedule shows, this price
turns out to be too low
because 100 are supplied
and 1,100 are demandedleaving a shortage of 1,000
CDs. The price tends to go
up and down until it reaches
equilibrium price.
Discussion Question
What is the equilibrium price and
why is it important?
The price at which supply and
demand meet; because it shows how
the market works to establish prices.
86
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Shifts in Equilibrium Price
• If the demand curve shifts due to
something other than price, the
equilibrium price will change. 
• If the supply curve shifts due to
something other than price, the
equilibrium price will change.
87
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Shifts in Equilibrium Price (cont.)
Figure 7.12
Change in Equilibrium
Price
When the supply or
demand curves shift,
the equilibrium price also
changes. Note that the
old equilibrium price was
$15. But now the new
demand curve intersects
the supply curve at a
higher price–$17.
Discussion Question
Suppose that your jeans are at the
equilibrium price. There is
suddenly a shortage of cotton in the
world market. 
What will happen to the demand
curve, the supply curve, and the
equilibrium price?
89
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Discussion Question
The supply curve will shift to the left,
meaning that less pairs of jeans will
be produced. The demand curve will
remain the same. The price will go
up. Then the demand will decrease
because the price will have
increased. Finally the equilibrium
price will be higher than before.
90
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Prices Serve as Signals
• Rising prices signal producers to make
more and consumers to purchase less. 
• Falling prices signal producers to make
less and consumers to purchase more. 
• Shortages occur when the quantity
demanded (at equilibrium price) is greater
than quantity supplied. 
• Surpluses occur when the quantity
supplied (at equilibrium price) is greater
than quantity demanded. 
• Market forces can cause the prices to rise
or fall to correct shortages and surpluses.
91
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Discussion Question
Think of a situation in which it is
important that the government
prevent market forces from dealing
with shortages and surpluses.
92
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Discussion Question
Possible response: In a natural
disaster, such as a flood, many
people need water and food. At such
a time there is a shortage of clean
water for drinking. If government did
not intervene, market forces would
cause the prices of water (needed for
basic human survival) to increase to
a point that many people could not
afford it, and they would be ill or die.
93
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Price Controls
• Price ceilings are a maximum price set
by the government to prevent prices from
going above a certain level. 
• Items in short supply might be rationed. 
• Shortages can lead to a black market, or
illegal places to purchase such products
at exorbitant prices. 
• Price floors are minimum prices also set
by the government to prevent prices from
going below a certain level. 
• Price floors set minimum wage levels and
support agricultural prices.
94
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Price Controls (cont.)
Figure 7.13 Part A
Price Ceiling
More people would like to
rent an apartment at the
government-controlled
price, but apartment owners
are unwilling to build more
rental units if they cannot
charge higher rent. This
results in a shortage of
apartments to rent.
Price Controls (cont.)
Figure 7.13 Part B
Price Floor
The fast-food restaurant
business wants to hire
students at $4.15 an hour,
but the government has
set a minimum wage–a
price floor–of $5.15 an
hour. This results in a
surplus of workers.
Discussion Question
Consider the examples of farmers
and price floors from the text.
How can these price floors actually
hurt the economy?
The price floors might encourage
farmers to overproduce at times
when regular production would still
earn them a profit. In this way the
consumer does not always get the
best product for the best price.
97
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Section Assessment
How is the equilibrium price
determined?
Equilibrium price is located where
demand and supply curves intersect.
98
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Section Assessment (cont.)
How do shifts in equilibrium price
occur?
Equilibrium price changes occur
when supply or demand curves shift.
99
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Section Assessment (cont.)
How do price ceilings and price
floors restrict the free exchange of
prices?
They prevent prices from finding an
equilibrium between the quantity
demanded and supplied.
100
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Section Assessment (cont.)
Shortages Explain how a shortage
of professional sports tickets
determines the general price of
those tickets.
Shortages cause prices to rise;
therefore, a shortage of sports tickets
will cause their price to rise.
101
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Section Close
Create a visual representation that
illustrates equilibrium.
102
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Section 1: Demand
• Demand represents a consumer’s willingness
and ability to pay. 
• The law of demand states as price goes up,
quantity demanded goes down. As price goes
down, quantity demanded goes up. 
• Factors explaining the inverse relationship
between quantity demanded and price include
the real income effect, the substitution
effect, and diminishing marginal utility–or
how one’s additional satisfaction for a product
lessens with each additional purchase of it.
104
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Section 2: The Demand Curve and
Elasticity of Demand
• The downward-sloping demand curve
signifies that as the price falls, the quantity
demanded increases. 
• Changes in population, income, tastes and
preferences, and the existence of substitutes,
or complementary goods, affect demand. 
• The price elasticity of demand is a measure
of how much consumers respond to a price
change.
105
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Section 2: The Demand Curve and
Elasticity of Demand (cont.)
• If a small change in price causes a large
change in quantity demanded, the demand for
that good is said to be elastic. 
• If a price change does not result in much of a
change in the quantity demanded, that
demand is considered inelastic.
106
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Section 3: The Law of Supply and
the Supply Curve
• The law of supply states as the price rises
for a good, the quantity supplied also rises.
As the price falls, the quantity supplied falls. 
• The upward-sloping supply curve shows this
direct relationship between quantity supplied
and price. 
• Four factors determine supply in a market
economy. These include the price of inputs,
the number of firms in the industry, taxes, and
technology.
107
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Section 4: Putting Supply and
Demand Together
• In free enterprise systems, prices serve as
signals to producers and consumers. 
• The point at which the quantity demanded
and the quantity supplied meet is called the
equilibrium price. 
• A shortage causes prices to rise, signaling
producers to produce more and consumers to
purchase less.
108
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Section 4: Putting Supply and
Demand Together (cont.)
• A surplus causes prices to drop, signaling
producers to produce less and consumers to
purchase more. 
• A price ceiling, which prevents prices from
going above a specified amount, often leads
to shortages and black market activities. 
• A price floor prevents prices such as a
minimum wage from dropping too low.
109
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Recalling Facts and Ideas
What is the basis of most activity in
a market economy?
Most activity in a market economy is
based on voluntary exchange.
111
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Recalling Facts and Ideas (cont.)
What generally happens to quantity
demanded when the price of a good
goes up (and other prices stay the
same)?
When the price of a good goes up,
generally quantity demanded falls.
112
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Recalling Facts and Ideas (cont.)
When the price of a good changes,
what effects tend to create the law of
demand?
When the price of a good changes,
the real income effect and the
substitution effect create the law of
demand.
113
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Recalling Facts and Ideas (cont.)
How do we show in a graph an
increase in the demand for a good?
The demand curve moves to the right.
114
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Recalling Facts and Ideas (cont.)
What is the distinction between
elastic and inelastic demand?
Elastic demand means consumers
are more responsive to price
changes. Inelastic means they are
less responsive.
115
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Recalling Facts and Ideas (cont.)
If income and population increase,
what tends to happen to demand
curves?
If income and population increase, the
demand curves shift to the right.
116
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Recalling Facts and Ideas (cont.)
Do suppliers tend to produce less or
more when the price goes up? Why?
Suppliers tend to produce more when
the price goes up to take advantage
of increased profits.
117
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Recalling Facts and Ideas (cont.)
What would an increase in taxes do
to the position of the supply curve?
An increase in taxes would shift the
supply curve to the left.
118
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Recalling Facts and Ideas (cont.)
If the price of a product is above its
equilibrium price, what is the result?
If the price of a product is above its
equilibrium price, there is a surplus.
119
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Recalling Facts and Ideas (cont.)
If the price of a product is below its
equilibrium price, what is the result?
If the price of a product is below its
equilibrium price, there is a shortage.
120
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Thinking Critically
Making Generalizations To what
extent do you think the law of
demand applies in the world around
you? Are there any goods or
services that you think do not follow
the law of demand? Explain.
Answers will vary.
121
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Thinking Critically (cont.)
Making Comparisons If you had to
guess the relative price elasticities
of demand for CDs compared to that
of insulin needed by diabetics, what
would you state?
Demand for CDs, a luxury, is elastic.
Demand for insulin, a necessity for
diabetics, is inelastic.
122
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Reviewing Skills
Understanding Cause and Effect Look at the graph
below. Be prepared to answer questions that follow on
the next three slides.
123
Reviewing Skills (cont.)
How many pounds of beef are
supplied at $1.89 per pound?
1,000,000
pounds
124
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Reviewing Skills (cont.)
How many pounds of beef are
supplied at $2.69 per pound?
6,000,000
pounds
125
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Reviewing Skills (cont.)
What can you infer as the causeand-effect relationship here?
Rising
prices
cause
producers
to supply
more beef.
126
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In the American economy, what
forces other than supply and
demand help to set prices?
Government regulations, such as price
ceilings and floors, help set prices.
127
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In 1998 the President of the United States earned a
salary of $200,000 plus a $50,000 expense
account. That same year Mike Piazza signed a
seven-year contract to play baseball for the New
York Mets for $13 million per year–more than 50
times the President’s annual salary.
Why do major league players get paid
higher salaries than the President of the
United States?
Click the mouse button to return to the Contents slide.
Explore online information about the
topics introduced in this chapter.
Click on the Connect button to launch your browser and go to the
Economics: Today and Tomorrow Web site. At this site, you will find
interactive activities, current events information, and Web sites
correlated with the chapters and units in the textbook. When you
finish exploring, exit the browser program to return to this
presentation. If you experience difficulty connecting to the Web site,
manually launch your Web browser and go to
http://glencoe.com/sec/socialstudies/economics/econtoday2005/
index.php
Explore online information about the
topics introduced in this chapter.
Click on the Connect button to launch your browser and go to the
BusinessWeek Web site. At this site, you will find up-to-date
information dealing with all aspects of economics. When you
finish exploring, exit the browser program to return to this
presentation. If you experience difficulty connecting to the Web
site, manually launch your Web browser and go to
http://www.businessweek.com
Technology
Demand for ice-cold soft drinks is greater during hot
weather than in the winter months. The management of
the Coca-Cola Company thinks this rather obvious fact
should be reflected in prices charged at vending
machines, and they have developed technology to do just
that. A computer chip in the vending machine responds to
temperatures and raises the price of soft drinks as the
weather gets warmer. The company is looking at other
ways to make vending-machine prices more reflective of
demand. One idea is to link price to traffic at a machine. If
few people buy from the machine, prices might drop
automatically.
History: Wage and
Price Controls
In the early 1970s, stagflation wracked the American
economy. To combat this economic slow-down
accompanied by high inflation, President Richard Nixon
imposed a 90-day wage and price freeze. At the end of
this period, he set ceilings on annual wage and price
increases–5.5 percent for wages and 2.5 percent for
prices. These measures helped to stabilize the economy.
However, when the ceilings were lifted in 1973, prices
rose sharply. As a result, President Nixon imposed new
wage and price controls. These controls, in one form or
another, remained in place until 1981, when President
Ronald Reagan repealed them.
How to Make a Mint
To keep customers interested, Hint Mint has
debuted a limited edition signed artist series of
tins. The first tin in the series was designed by
Doug Rogers, art director for the movie Shrek.
Read the BusinessWeek Spotlight on the
Economy article on page 176 of your textbook.
Learn how one entrepreneur created a demand
for mints as a “fashion accessory.”
Continued on next slide.
This feature is found on page 176 of your textbook.
How to Make a Mint
What makes Hint Mint different from
other mints?
Hint Mints stand out from other mints
because of the arty tins they are
packaged in.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 176 of your textbook.
How to Make a Mint
Based on the article, what elements must
be considered when developing a new
product?
When developing a new product the
name, concept, and market research are
elements that must be considered.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 176 of your textbook.
Continued on next slide.
Continued on next slide.
Continued on next slide.
Continued on next slide.
What Is Demand?
Demand and Supply
What Is Supply?
Economics and You
Video 5: What Is Demand?
After viewing What Is Demand?, you should be
able to… 
• explain the law of demand. 
• differentiate between elastic and inelastic
demand.
Continued on next slide.
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Economics and You
Video 5: What Is Demand?
Disc 1, Side 1
Chapter 5
Click the Videodisc button
anytime throughout this
section to play the complete
video if you have a videodisc
player attached to your
computer.
Click the Forward button to
view the discussion questions
and other related slides.
Click inside the box to play the preview.
Continued on next slide.
Economics and You
Video 5: What Is Demand?
What is the law of demand?
When a product’s price
falls, consumers are more
likely to buy it.
Disc 1, Side 1
Chapter 5
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to display the answer.
Economics and You
Video 7: Demand and Supply
After viewing Demand and Supply, you should
be able to… 
• describe the price relationships between
demand and supply. 
• compare elastic and inelastic demand.
Continued on next slide.
Click the mouse button or press the Space Bar
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Economics and You
Video 7: Demand and Supply
Disc 1, Side 1
Chapter 7
Click the Videodisc button
anytime throughout this
section to play the complete
video if you have a videodisc
player attached to your
computer.
Click the Forward button to
view the discussion questions
and other related slides.
Click inside the box to play the preview.
Continued on next slide.
Economics and You
Video 7: Demand and Supply
As the price of vacation homes increases,
what will happen to the supply of and
demand for such properties?
The supply of homes will
rise, and the demand for
such properties will fall.
Disc 1, Side 1
Chapter 7
Click the mouse button or press the Space Bar
to display the answer.
Economics and You
Video 6: What is Supply?
After viewing What is Supply?, you should be
able to… 
• explain the law of supply. 
• identify some factors that can cause a
change in the supply of a product. 
• define marginal product.
Continued on next slide.
Click the mouse button or press the Space Bar
to display the information.
Economics and You
Video 6: What is Supply?
Disc 1, Side 1
Chapter 6
Click the Videodisc button
anytime throughout this
section to play the complete
video if you have a videodisc
player attached to your
computer.
Click the Forward button to
view the discussion questions
and other related slides.
Click inside the box to play the preview.
Continued on next slide.
Economics and You
Video 6: What is Supply?
What is the law of supply?
The law of supply states
that when prices of a
product are higher, sellers
will supply a larger quantity
of the product.
Disc 1, Side 1
Chapter 6
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Understanding Cause
and Effect
Understanding cause and effect involves
considering why an event occured. A cause is
the action or situation that produces an event.
What happens as a result of a cause is an
effect.
Continued on next slide.
This feature is found on page 193 of your textbook.
Understanding Cause
and Effect
Learning the Skill
To identify cause-and-effect relationships, follow
the steps listed below: 
• Identify two or more events or developments. 
• Decide whether one event caused the other. Look for
“clue words” such as because, led to, brought about,
produced, as a result of, so that, since,
and therefore.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information. This feature is found on page 193 of your textbook.
Understanding Cause
and Effect
Learning the Skill (cont.)
• Look for logical relationships between events, such
as “She overslept, and then she missed her bus.”
• Identify the outcomes of events. Remember that
some effects have more than one cause, and some
causes lead to more than one effect. Also, an effect
can become the cause of yet another effect.
Continued on next slide.
This feature is found on page 193 of your textbook.
Understanding Cause
and Effect
Practicing the Skill
• The classic cause-and-effect relationship in
economics is between price and quantity
demanded/quantity supplied. 
• As the price for a good rises, the quantity demanded
goes down and the quantity supplied rises. 
• Knowing this, answer the questions on the next
two slides.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information. This feature is found on page 193 of your textbook.
Understanding Cause
and Effect
Look at the figure to
the right. What caused
the big sale? What is
the effect on consumers?
The store is carrying a
large inventory and needs
get rid of it to make way
for next year’s model.
Consumers pay lower prices.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 193 of your textbook.
Understanding Cause
and Effect
Look at the demand curve
for DVD players to the
right. If the price is
$5,000, how many will be
demanded per year? If
the price drops to $1,000,
how many will be
demanded per year?
1 million at $5,000
5 million at $1,000
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 193 of your textbook.
Demand for Oil
Americans demand oil for many purposes,
but mostly as a fuel for their automobiles.
According to the Department of Energy, as of
2002 about 193 million vehicles were burning
122 billion gallons of gasoline a year.
Domestic supplies meet about half of the
demand for oil. Look at the next slide to see
where we get the rest.
Continued on next slide.
A natural disaster in one part of the world may
have an impact on supply elsewhere. An
earthquake that hit Taiwan in September 1999
severely disrupted that country’s computer chip
industry. The resulting shortage led to increases in
chip prices–as much as 25 percent for some types
of memory chips. Almost immediately, several
American computer makers said that the price
increases would have a negative effect on “product
availability”–or supply.
Hollywood North?
American movies and television programs are
popular in foreign markets. The bustling
“American” city scenes and wide open landscapes,
however, most likely were filmed in Canada. A
favorable exchange rate for the American dollar
and government tax breaks make moviemaking
much cheaper in Canada than in the United States.
Today, three of the top seven movie and television
production centers–Vancouver, Toronto, and
Montreal–are in Canada.
Alfred Marshall
1842–1924
Click the picture to listen to
the selection on page 200
of your textbook to find out
more about Alfred Marshall.
Be prepared to answer
questions that appear on
the next two slides.
This feature is found on page 200 of your textbook.
Alfred Marshall
1842–1924
What does Marshall
mean by “equilibrium
between desire and
effort”?
Answers will vary but should
indicate the point at which
satisfaction created by effort has arrived
at its maximum. At this point, additional
effort takes away from the pleasure of
attaining the desire.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 200 of your textbook.
Alfred Marshall
1842–1924
What is an equilibrium
price?
An equilibrium price is a price
that is fixed at the beginning
and adhered to throughout
marketing. It equates supply
and demand.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 200 of your textbook.
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