Chapter 3 Demand and Supply Circular Flow Model What things flow from each sector of the economy? From Firms? From Households? Demand 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 Equilibrium 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 Equilibrium Point of Equilibrium Surpluses (excess supply) Shortages (excess demand) Elasticity 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?