Based on chapters 3 & 6 of this module, your Reflection paper should contain 400 words or more. explain what you learned in the corresponding module using your own words.

chapter 3 Why Can We Not Get Enough of Organic Foods? Organic food is increasingly popular, not just in the United States, but worldwide. At one time, consumers had to go to specialty stores or farmers' markets to find organic produce. Now it is available in most grocery stores. In short, Demand and Supply 3 BRING IT HOME organic has become part of the mainstream. Ever wonder why organic food costs more than conventional food? Why, say, does an organic Fuji apple cost $2.75 a pound, while its conventional counterpart costs $1.72 a pound? The same price relationship is true for just about every organic product on the market. If many organic foods are locally grown, would they not take less time to get to market and therefore be cheaper? What are the forces that keep those prices from coming down? Turns out those forces have quite a bit to do with this chapter's topic: demand and supply. An auction bidder pays thousands of dollars for a dress Whitney Houston wore. A collector spends a small fortune for a few drawings by John Lennon. People usually react to purchases like these in two ways: their jaw drops because they think these are high prices to pay for such goods or they think these are rare, desirable items and the amount paid seems right. LINK IT UP Visit this website (http://openstax.org/l/celebauction) to read a list of bizarre items that have been purchased for their ties to celebrities. These examples represent an interesting facet of demand and supply. When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: that of a gallon of gas. Why was the average price of gasoline in the United States $3.16 per gallon in June of 2020? Why did the price for gasoline fall sharply to $2.42 per gallon by January of 2021? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept. As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supplyone of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities. 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services LEARNING OBJECTIVES By the end of this section, you will be able to: Explain demand, quantity demanded, and the law of demand Explain supply, quantity supplied, and the law of supply Identify a demand curve and a supply curve Explain equilibrium, equilibrium price, and equilibrium quantity First let's first focus on what economists mean by demand, what they mean by supply, and then how demand and

supply interact in a market. Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is fundamentally based on needs and wantsif you have no need or want for something, you won't buy it. While a consumer may be able to differentiate between a need and a want, from an economist's perspective they are the same thing. Demand is also based on ability to pay. If you 48 3 Demand and Supply Access for free at openstax.org cannot pay for it, you have no effective demand. By this definition, a person who does not have a drivers license has no effective demand for a car. What a buyer pays for a unit of the specific good or service is called price. The total number of units that consumers would purchase at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price of a gallon of gasoline increases, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand. The law of demand assumes that all other variables that affect demand (which we explain in the next module) are held constant. We can show an example from the market for gasoline in a table or a graph. Economists call a table that shows the quantity demanded at each price, such as Table 3.1, a demand schedule. In this case we measure price in dollars per gallon of gasoline. We measure the quantity demanded in millions of gallons over some time period (for example, per day or per year) and over some geographic area (like a state or a country). A demand curve shows the relationship between price and quantity demanded on a graph like Figure 3.2, with quantity on the horizontal axis and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical axis. While economists often use math, they are different disciplines.

FIGURE 3.2 A Demand Curve for Gasoline The demand schedule shows that as price rises, quantity demanded decreases, and vice versa. We graph these points, and the line connecting them is the demand curve (D). The downward slope of the demand curve again illustrates the law of demandthe inverse relationship between prices and quantity demanded. Demand curves will appear somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. Demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases. Confused about these different types of demand? Read the next Clear It Up feature. Is demand the same as quantity demanded? In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to a (specific) point on the curve. Supply of Goods and Services When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service. A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied. When the price of gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants for refining into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. Economists call this positive relationship between price and quantity suppliedthat a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity suppliedthe law of supply. The law of supply assumes that all other variables that affect supply (to be explained in the next module) are held constantRemember this: When two lines on a diagram cross, this intersection usually means something. The point where the supply curve (S) and the demand curve (D) cross, designated by point E in Figure 3.4, is called the equilibrium. The equilibrium price is the only price where the plans of consumers and the plans of producers agreethat is, where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied). Economists call this common quantity the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price. In Figure 3.4, the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million gallons. If you had only the demand and supply schedules, and not the graph, you could find the equilibrium by looking for the price level on the tables where the quantity demanded and the quantity supplied are equal. The word "equilibrium" means "balance." If a market is at its equilibrium price and quantity, then it has no reason to move away from that point. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity. Imagine, for example, that the price of a gallon of gasoline was above the equilibrium pricethat is, instead of $1.40 per gallon, the price is $1.80 per gallon. The dashed horizontal line at the price of $1.80 in Figure 3.4 illustrates this above-equilibrium price. At this higher price, the quantity demanded drops from 600 to 500. This decline in quantity reflects how consumers react to the higher price by finding ways to use less gasoline. Moreover, at this higher price of $1.80, the quantity of gasoline supplied rises from 600 to 680, as the higher price makes it more profitable for gasoline producers to expand their output. Now, consider how quantity demanded and quantity supplied are related at this above-equilibrium price. Quantity demanded has fallen to 500 gallons, while quantity supplied has risen to 680 gallons. In fact, at any above-equilibrium price, the quantity supplied exceeds the quantity demanded. We call this an excess supply or a surplus. With a surplus, gasoline accumulates at gas stations, in tanker trucks, in pipelines, and at oil refineries. This accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those firms involved in making and selling gasoline are not receiving enough cash to pay their workers and to cover their expenses. In this situation, some producers and sellers will want to cut prices, because it is better to sell at a lower price than not to sell at all. Once some sellers start cutting prices, others will follow to avoid losing sales. These price reductions in turn will stimulate a higher quantity demanded. Therefore, if the price is above the equilibrium level, incentives built into the structure of demand and supply will create pressures for the price to fall toward the equilibrium. Now suppose that the price is below its equilibrium level at $1.20 per gallon, as the dashed horizontal line at this price in Figure 3.4 shows. At this lower price, the quantity demanded increases from 600 to 700 as drivers take longer trips, spend more minutes warming up the car in the driveway in wintertime, stop sharing rides to work, and buy larger cars that get fewer miles to the gallon. However, the below-equilibrium price reduces gasoline producers' incentives to produce and sell gasoline, and the quantity supplied falls from 600 to 550.

chapter 6

CHAPTER OBJECTIVES In this chapter, you will learn about: Measuring the Size of the Economy: Gross Domestic Product Adjusting Nominal Values to Real Values Tracking Real GDP over Time Comparing GDP among Countries How Well GDP Measures the Well-Being of Society Introduction to the Macroeconomic Perspective How is the Economy Doing? How Does One Tell? The 1990s were boom years for the U.S. economy. Beginning in the late 2000s, from 2007 to 2014, economic performance in the U.S. was poor. The economy experienced another period of strong growth between 2014 and 2019, before COVID-19 rocked the world economy in March and April of 2020. What causes the economy to expand or contract? Why do businesses fail when they are making all the right decisions? Why do workers lose their jobs when they are hardworking and productive? Are bad economic times a failure of the market system? Are they a The Macroeconomic Perspective 6 BRING IT HOME failure of the government? These are all questions of macroeconomics, which we will begin to address in this chapter. We will not be able to answer all of these questions here, but we will start with the basics: How is the economy doing? How can we tell? The macro economy includes all buying and selling, all production and consumption; everything that goes on in every market in the economy. How can we get a handle on that? The answer begins more than 80 years ago, during the Great Depression. President Franklin D. Roosevelt and his economic advisers knew things were badbut how could they express and measure just how bad it was? An economist named Simon Kuznets, who later won the Nobel Prize for his work, came up with a way to track what the entire economy is producing. In this chapter, you will learn how the government constructs GDP, how we use it, and why it is so important Macroeconomics focuses on the economy as a whole (or on whole economies as they interact). What causes recessions? What makes unemployment stay high when recessions are supposed to be over? Why do some countries grow faster than others? Why do some countries have higher standards of living than others? These are all questions that macroeconomics addresses. Macroeconomics involves adding up the economic activity of all households and all businesses in all markets to obtain the overall demand and supply in the economy. However, when we do that, something curious happens. It is not unusual that what results at the macro level is different from the sum of the microeconomic parts. What seems sensible from a microeconomic point of view can have unexpected or counterproductive results at the macroeconomic level. Imagine that you are sitting at an event with a large audience, like a live concert or a basketball game. A few people decide that they want a better view, and so they stand up. However, when these people stand up, they block the view for other people, and the others need to stand up as well if they wish to see. Eventually, nearly everyone is standing up, and as a result, no one can see much better than before. The rational decision of some individuals at the micro levelto stand up for a better viewended up as self-defeating at the macro level. This is not macroeconomics, but it is an apt analogy. Macroeconomics is a rather massive subject. How are we going to tackle it? Figure 6.2 illustrates the structure we will use. We will study macroeconomics from three different perspectives: 1. What are the macroeconomic goals? (Macroeconomics as a discipline does not have goals, but we do have goals for the macro economy.) 2. What are the frameworks economists can use to analyze the macroeconomy? 3. Finally, what are the policy tools governments can use to manage the macroeconomy? FIGURE 6.2 Macroeconomic Goals, Framework, and Policies This chart shows what macroeconomics is about. The box on the left indicates a consensus of what are the most important goals for the macro economy, the middle box lists the frameworks economists use to analyze macroeconomic changes (such as inflation or recession), and the box on the right indicates the two tools the federal government uses to influence the macro economy. Goals In thinking about the macroeconomy's overall health, it is useful to consider three primary goals: economic growth, low unemployment, and low inflation. Economic growth ultimately determines the prevailing standard of living in a country. Economists measure growth by the percentage change in real (inflation-adjusted) gross domestic product. A growth 138 6 The Macroeconomic Perspective Access for free at openstax.org rate of more than 3% is considered good. Unemployment, as measured by the unemployment rate, is the percentage of people in the labor force who do not have a job. When people lack jobs, the economy is wasting a precious resource-labor, and the result is lower goods and services produced. Unemployment, however, is more than a statisticit represents people's livelihoods. While measured unemployment is unlikely to ever be zero, economists consider a measured unemployment rate of 5% or less low (good). Inflation is a sustained increase in the overall level of prices, and is measured by the consumer price index. If many people face a situation where the prices that they pay for food, shelter, and healthcare are rising much faster than the wages they receive for their labor, there will be widespread unhappiness as their standard of living declines. For that reason, low inflationan inflation rate of 1-2%is a major goal. Frameworks As you learn in the micro part of this book, principal tools that economists use are theories and models (see Welcome to Economics! for more on this). In microeconomics, we used the theories of supply and demand. In macroeconomics, we use the theories of aggregate demand (AD) and aggregate supply (AS). This book presents two perspectives on macroeconomics: the Neoclassical perspective and the Keynesian perspective, each of which has its own version of AD and AS. Between the two perspectives, you will obtain a good understanding of what drives the macroeconomy. Policy Tools National governments have two tools for influencing the macroeconomy. The first is monetary policy, which involves managing the money supply and interest rates. The second is fiscal policy, which involves changes in government spending/purchases and taxes. We will explain each of the items in Figure 6.2 in detail in one or more other chapters. As you learn these things, you will discover that the goals and the policy tools are in the news almost every day. 6.1 Measuring the Size of the Economy: Gross Domestic Product LEARNING OBJECTIVES By the end of this section, you will be able to: Identify the components of GDP on the demand side and on the supply side Evaluate how economists measure gross domestic product (GDP) Contrast and calculate GDP, net exports, and net national product Macroeconomics is an empirical subject, so the first step toward understanding it is to measure the economy. How large is the U.S. economy? Economists typically measure the size of a nation's overall economy by its gross domestic product (GDP), which is the value of all final goods and services produced within a country in a given year. Measuring GDP involves counting the production of millions of different goods and servicessmart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services that a country produced in the current yearand summing them into a total dollar value. This task is straightforward: take the quantity of everything produced, multiply it by the price at which each product sold, and add up the total. In 2020, the U.S. GDP totaled $20.9 trillion, the largest GDP in the world. Each of the market transactions that enter into GDP must involve both a buyer and a seller. We can measure an economy's GDP either by the total dollar value of what consumers purchase in the economy, or by the total dollar value of what is the country produces. There is even a third way, as we will explain later. GDP Measured by Components of Demand Who buys all of this production? We can divide this demand into four main parts: consumer spending (consumption), business spending (investment), government spending on goods and services, and spending 6.1 Measuring the Size of the Economy: Gross Domestic Product 139 on net exports. (See the following Clear It Up feature to understand what we mean by investment.) Table 6.1 shows how these four components added up to the GDP in 2020, Figure 6.4 (a) shows the levels of consumption, investment, and government purchases over time, expressed as a percentage of GDP, while Figure 6.4 (b) shows the levels of exports and imports as a percentage of GDP over time. A few patterns about each of these components are worth noticing. Table 6.1 shows the components of GDP from the demand side GDP measures economic activity, not all activity. As a result, economists like Kate Raworth see it as a somewhat outdated and limited indication of well-being and prosperity. While GDP measures output of work done at home, as well as spending on travel, it doesn't capture unpaid work or leisure time. So, two countries may have equal GDP, but one nation's workers may have an average workday of eight hours, while the other has an average workday of twelve hours. In that case, is their equal GDP truly measuring the prosperity of those nations? The GDP per capita of the U.S. economy is larger than the GDP per capita of Germany, as Table 6.9 showed, but does that prove that the standard of living in the United States is higher? Not necessarily, since it is also true that the average U.S. worker works several hundred hours more per year more than the average German worker. Calculating GDP does not account for the German worker's extra vacation weeks. While GDP includes what a country spends on environmental protection, healthcare, and education, it does not include actual levels of environmental cleanliness, health, and learning. GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier. GDP includes spending on medical care, but does not address whether life expectancy or infant mortality have risen or fallen. Similarly, it counts spending on education, but does not address directly how much of the population can read, write, or do basic mathematics. GDP includes production that is exchanged in the market, but it does not cover production that is not exchanged in the market. For example, hiring someone to mow your lawn or clean your house is part of GDP, but doing these tasks yourself is not part of GDP. One remarkable change in the U.S. economy in recent decades is the growth in women's participation in the labor force. As of 1970, only about 42% of women participated in the paid labor force. By the second decade of the 2000s, nearly 60% of women participated in the paid labor force according to the Bureau of Labor Statistics. As women are now in the labor force, many of the services they used to produce in the non-market economy like food preparation and child care have shifted to some extent into the market economy, which makes the GDP appear larger even if people actually are not consuming more services. However, as Raworth points out and was explored in the chapter on the labor market, even women who are fully employed expend significant effort (generally more than men) in raising children and maintaining a home. Raworth advocates that economic measures include monetized and unmonetized goods and services, so that the status and contributors to each economy are more accurate. GDP has nothing to say about the level of inequality in society. GDP per capita is only an average. When GDP per capita rises by 5%, it could mean that GDP for everyone in the society has risen by 5%, or that GDP of some groups has risen by more while that of others has risen by lessor even declined. GDP also has nothing in particular to say about the amount of variety available. If a family buys 100 loaves of bread in a year, GDP does not care whether they are all white bread, or whether the family can choose from wheat, rye, pumpernickel, and many othersit just looks at the total amount the family spends on bread. Likewise, GDP has nothing much to say about what technology and products are available. The standard of living in, for example, 1950 or 1900 was not affected only by how much money people hadit was also affected by what they could buy. No matter how much money you had in 1950, you could not buy an iPhone or a personal computer. In certain cases, it is not clear that a rise in GDP is even a good thing. If a city is wrecked by a hurricane, and 6.5 How Well GDP Measures the Well-Being of Society 159 then experiences a surge of rebuilding construction activity, it would be peculiar to claim that the hurricane was therefore economically beneficial. If people are led by a rising fear of crime, to pay for installing bars and burglar alarms on all their windows, it is hard to believe that this increase in GDP has made them better off. Similarly, some people would argue that sales of certain goods, like pornography or extremely violent movies, do not represent a gain to society's standard of living.