1. Supply and Demand The Heart & Soul of Market Economics

2. Key Terms for S & D Unit Normal Good- Goods which can “replace” other goods Income => Demand Px good A => Demand good B Goods which “go together” (are needed to use the other) Px good A => Demand good B Gas & Cars Soda & Water Inferior Good- Substitute- Compliment-

3. Price 0 9.00 7.00 5.00 3.00 1.00 35791113151719 21 23 25 Quantity $11.00 1. A decrease in price... 2....increases quantity demanded D1D1 Pizza by the Slice Market Price ↓ => Qty D↑ Demand Schedule (used to construct a demand curve) Will you buy a slice of Pizza? Demand Schedule Price Quantity $11.00______ $9.00______ $7.00______ $5.00______ $3.00______ $1.00______

4. Demand The quantity of goods or services that consumers are willing and able to purchase at various prices Law of Demand Inverse Relationship Price Decrease Qty Demanded increases

5. Utility Total Utility means the total satisfaction a person receives when purchasing a good or service Marginal Utility : The amount of additional satisfaction a person gets from one additional unit of a product

6. Law of Diminishing Marginal Utility As more units are consumed => additional satisfaction falls Marginal Utility

7. Pricing Lessons of Diminishing Marginal Utility Marginal Utility Give volume discounts: Examples: a dozen donuts 3 T-shirts in a package “free” refills on large popcorn

8. 3 reasons D-Curve slopes downward 1) Law of Diminishing Marginal Utility (returns) 2) Substitution Effect- change in Qty D resulting from a ∆ in relative price of other goods 3) Income Effect- change in Qty D resulting from a ∆ in purchasing power (real income) D Price Quantity ∆ = change

9. Supply The quantity of a product or service that a firm is willing and able to sell at various prices Law of Supply Positive Relationship Price increasesQty Supplied increases

10. Supply Curve Price Qty S1S1

11. Equilibrium: when Demand equals Supply Price Qty You must label ALL points on graphs to receive credit T-Shirts D1D1 S1S1 -------------- ------------- P1P1 Q1Q1 E1E1

12. Market Demand Curve Price 2.00 4 3 7 1.00 8 5 13 Qty Catherine’s Demand Nicholas’s Demand Market Demand + = When price is $2.00, Catherine demands 4 ice-cream cones When price is $2.00, Nicholas demands 3 ice-cream cones. The market demand at $2.00 will be 7 ice-cream cones. The market demand curve is the sum of the individual demand curves! Ice Cream Cones