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Chapter 3
Demand and Supply
Circular Flow Model
 What things flow
from each sector of
the economy?
 From Firms?
 From Households?
Willingness to buy at a certain price.
Law of Demand
Demand Schedule
Demand Curve
 What factors affect demand?
Determinants of Demand
(Shift in Curve)
 Tastes
 Income
 Income Rise= Demand Rise
 Price of related products
 Substitute goods
 Hot Dogs vs. Hamburgers
 Complementary goods
 Products used with each other
 Cars and Gas (SUV’s)
 Number of Potential Customers
The Law of Supply
 Supply
 # of units firm is willing to sell
 Diminishing returns
 Cost of producing additional items increases
 Law of supply
 Higher prices = higher quantity supplied
Changes in Supply
 Costs of Production
 Increased cost = decreased supply
 Changes in the FOP
 Wages increase= supply decrease
Minimum Wage and
 Unfortunately, the real minimum wage is
always zero, regardless of the laws, and that is
the wage that many workers receive in the
wake of the creation or escalation of a
government-mandated minimum wage,
because they lose their jobs or fail to find jobs
when they enter the labor force. Making it
illegal to pay less than a given amount does
not make a worker’s productivity worth that
amount—and, if it is not, that worker is unlikely
to be employed.
Surplus, Shortages, and
 Point of Equilibrium
Surpluses (excess supply)
(excess demand)
 Effect of the change in price on Demand
 Price Inelastic
 Price doesn’t affect demand
 Ex. Water
 Steeper Curve
 Price Elastic
 Demand very sensitive to Price
 Flatter Curve
Which of these is most
elastic? Why?
What real world event
could cause this action?
What could cause this?
What real world event
could cause this action?