3.

1 : Fundamentals of Demand:
Demand : the desire to own something and the ability to pay for it .
Law of Demand : consumers will buy more of a good when its price is
lower and less when its price is higher.

Substitution effect : when a consumer reacts to a rise in the price of

one good by consuming less of that good and more of a substitute
good .

Income effect : the change in consumption that results in response to

changes in price .

Demand schedule : a table that lists the quantity of a good that a

person will purchase at various prices in a market

Demand curve : a graphic representation of a demand schedule.

Summarize the law of demand below and provide a

real life example of it in action :
• Law of Demand: As the price of a good increases, consumers
will buy less of it; as the price decreases, consumers will buy
more of it

• For example, if oranges go on sale, consumers will buy more of

them

• For example, if movie tickets become more expensive,

consumers will buy fewer of them
The Substitution Effect” and “The Income Effect,”
compare and contrast the substitution effect and the
income effect.

• Both the substitution effect and the income effect are brought on
by a change in prices. They differ in their effect.

• With the substitution effect, for example, a price increase would

reduce demand for that good or service but increase it for other,
similar goods and services.

• With the income effect, a rise in prices lowers demand for all
goods and services.

What is the relationship between the words curve and

graph in this discussion about demand graphs?

• The words "curve" and "graph" mean the same thing in this
context.
 2.6 : Supporting Economic
Growth :
Macroeconomics: the study of economic behavior and decision-
making in a nation’s whole economy.

Microeconomics: the study of economic behavior and decision-

making in small units, such as households and firms.

Gross domestic product (GDP): the total value of all final goods and
services produced in a country in a given year.

Business cycle: a period of macroeconomic expansion, or growth,

followed by a period of contraction, or decline.

Obsolescence: situation in which older products and processes

become out-of-date.

Patent: a government license that gives the inventor of a new product

the exclusive right to produce and sell it.

Copyright: a government license that grants an author exclusive

rights to publish and sell creative works.

If you pay attention to the news, you probably hear a

lot about national economic data such as
unemployment or gross domestic product (GDP). If
you have a steady job, why should you care how the
rest of the country is doing?
The better the whole economy, the more likely your company will stay
in business and the more likely you are to keep your job.
How does the government encourage economic
growth and stability? Use this graphic organizer to
record the key ideas from this reading .

Promoting Economic Strength

Employment Growth Stability and security

Goal : providing jobs for all able Goal : Goal:

workers

Actions : Actions : Actions :

Read the section “Stability.” Suppose you own a

business that sells hot dog buns and other bread
products to restaurants. What would happen if the
price of the wheat that is used to make buns went up?
Trace the economic impact from the wheat farmer to
the flour mill to your business to the restaurant and
beyond.
The wheat farmer raised his price (or the price went up due to a
shortage of grain), so the flour mill would have to charge more for
flour, so I would have to raise the price of the bread I make, so
restaurants would have to charge more, so people would have to pay
more.
Read the section “Technological Progress.” Suppose
you own a factory that makes something you like,
such as guitars or shoes. Hundreds of people work at
your factory, assembling products, packaging and
shipping products, and doing many other jobs. One
day you install a robotic system that replaces half your
workforce. The new system saves money and
increases your profits, but over 100 people lose their
jobs. Is that good for the economy or not? Explain
your answer.

Yes, that is good for the economy because resources are being used
more efficiently.
No, that is bad for the economy because so many people will be put
out of work

Consider the example of NASA in the section

“Encouraging Innovation.” What is a “spin-off”? What
are some examples of spin-offs that have come from
other companies (or NASA)? How have these products
benefitted people
A spin-off is a product created for one purpose (such as space
exploration by NASA) but able to be used for another, commercial
purpose (such as the GPS system developed by NASA for astronauts
now being used by regular people)

Some examples of spin-offs are: GPS, memory foam, vertical farming

systems, LASIK for eye surgeries, artificial limbs, 3D food-printing,
portable cordless vacuums, freeze-dried food, HACCP food safety
standards (together with Pillsbury), etc.
Copyright law is meant to ensure that the people who
create a work, such as a book, movie, or song, profit
from it. Why do you think it is necessary to have laws
to protect creative works of this sort?

Creative works such as books or movies are property, just like inventions or
other intellectual property.
It often takes many years to create books or movies, so it is important to
protect this kind of property in order to encourage people to create it.
If it could be easily stolen, people might be less likely to take the time to create
such works (because all their years of hard work wouldn’t pay off literally and
someone else would profit from their hard work and effort.
 2.7 : Public Goods and
Externalities :
Public good: a shared good or service for which it would be inefficient
or impractical to make consumers pay individually and to exclude
those who did not pay .

Public sector: the part of the economy that involves the transactions
of the government .

Private sector: the part of the economy that involves the transactions
of individuals and businesses .

Infrastructure: the basic facilities that are necessary for a society to

function and grow (such as roads & highways, bridges, ports,
electrical power grids, hospitals, schools, government buildings,
airports, etc.)

Free rider: someone who would not be willing to pay for a certain
good or service but who would get the benefits of it anyway if it were
provided as a public good .

Market failure: a situation in which the free market, operating on its

own, does not distribute resources efficiently

Externality: an economic side effect of a good or service that

generates benefits or costs to someone other than the person
deciding how much to produce or consume (that is, unintended
consequences).
What is the difference between private goods and
public goods? Explain the difference using examples :
• Private goods are products that can efficiently be exchanged in
the marketplace by consumers and producers (ex: clothing, food,
skincare products, toys, furniture, vehicles, electronics, etc.)

• Public goods are provided by the government, because trying

to exchange them in the marketplace is inefficient or impractical
(ex: things that everyone uses, such as roads, bridges,
streetlamps, airports, public hospitals and schools, ports,
hydroelectricity, etc.)

Explain why infrastructure is a public good:

• Private ownership would not be economically feasible—it would be
inefficient or impractical to make consumers pay to use roads,
bridges, or other infrastructure and to exclude nonpayers.

• Infrastructure—such as roads, bridges, shipping ports, and airports—

is vitally important to the nation as a whole. Government investment in
infrastructure uses resources in a way that maximizes the output of
roads, something that private ownership could not do.

How does an analysis of costs and benefits explain

why an expensive project, such as a highway, gets
produced as a public good, not a private good?
 • The benefit from the project must exceed the cost. For private
individuals to fund such a project, the cost to each is likely to be
greater than the benefit each receives from the project.

• When government—representing society as a whole—funds the

same project, the cost is borne/carried by all taxpaying citizens
and does not exceed the benefits.

What might be one positive externality and one

negative externality resulting from the establishment
of a trucking company in a neighborhood?

• Positive: Its employees buy lunch at the local café, thereby

boosting local businesses; local workers get trained & hired to be
truck drivers

• Negative: The rumble of trucks through the streets disturbs

nearby residents and customers and lowers air quality;