d $ QdQd

Markets Markets: Exist because no one is self- sufficient. Markets: Are needed to sell what we have and to buy what we want. A buyer and seller exercise their economic freedoms by working out their own terms of exchange referred to as a Voluntary Exchange.

Two Sides of the Market  Buying Side  Consumers  People who are buying something  Demand side  Selling Side  Producers  People that are producing or selling something  Supply Side

Demand Porsche Demand: willing and able to purchase a product at a particular time and place

Demand Schedule  A demand schedule is a table that lists the quantity of a good a person will buy at each different price. BillJillTotal $.50 $.25 A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.

 A demand curve is a graphical representation of a demand schedule.  It slopes downward and to the right.  Only changes in price  Illustrates Law of Demand The Demand Curve Market Demand Curve Slices of pizza per day Price per slice (in dollars)

The Demand Curve  Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.”  When reading a demand curve, assume all outside factors, such as income, are ceteris paribus or held constant, the only change is price.

Law of Demand  The law of demand states that consumers buy more of a good when its price decreases and less when its price increases. Price Goes Up Quantity Demanded Goes Down Price Goes Down Quantity Demanded Goes Up P=PriceQD= Quantity Demanded

Law of Demand  Movement along demand curve is always price related  “Price is a mover, not a shifter.”  Called: The Price Effect Market Demand Curve Slices of pizza per day Price per slice (in dollars)

Law of Diminishing Marginal Utility  Utility: the power a good or service has to satisfy a want  Utility = satisfaction  The more times you purchase an item in a set period of time, the less satisfaction you will receive from the purchase.

So What??  More utility - the more you are willing to pay for the product  Less utility - the less you are willing to pay for the product  So…… reflects Law of Demand – you will only purchase more at lower prices

Factors that Affect Quantity Demanded  Movement along Demand Curve  Price and Quantity Demanded move in opposite directions because of the law of diminishing marginal utility  Change in Quantity Demanded  Real Income  Substitution Effect

REAL INCOME  Real income limits the amount of money people are able to spend.  If the price of a good rises while their income stays the same, individuals cannot keep buying the same quantity.  The real income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income.

Income Effect  ↓ Price  More real income  ↑ Quantity demanded  ↑ Price  Less real income  ↓ Quantity demanded or you buy less

SUBSTITUTION EFFECT  The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods.  Suppose two items are not exactly the same, but satisfy basically the same need and their cost is about the same.  If the price of the original item rises, people will substitute the lower-priced good.

Substitution Effect  ↑ Price of original product  ↓ Quantity demanded for original product  ↑ Quantity demanded for comparable product (generic)

Change in Demand:  There are 7 factors that will cause the Demand curve to shift to the right or left.  When the curve shifts to the right it is an increase.  When the curve shifts to the left it is a decrease D

Determinants that cause a shift in the Demand Curve 1. Income  Changes in consumers incomes affect demand – decrease or increase in pay  A normal good is a good that consumers demand more of when their incomes increase.  An inferior good is a good that consumers demand less of when their income increases. 2. Substitutes  if two items satisfy the same need and the price of one rises, people will buy the other.  Examples: butter/margarine or Tide/Cheer

Causes a Shift in the Demand Curve 3. Complimentary Good  one product often used with another product; as the price of the second product decreases, the demand for the first product will increase; as the price of the second product increases, the demand for the first product will decrease.  Example: bread/butter or skis/ski boots 4. Seasons – don’t need skis in summer, less demand 5. Population  Changes in the size of the population also affects the demand for most products  Baby boomers have affected every product

Causes a Shift in the Demand Curve 6. Consumer Tastes and Advertising  Advertising plays an important role in many trends and therefore influences demand (Ex. bell bottom pants) 7. Consumer Expectations of prices  Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today (Ex. Freeze of oranges)

Demand for a good that consumers will continue to buy despite a price increase is inelastic. –Examples: Electricity, salt, pepper, sugar, certain types of medicine. Elasticity of demand is a measure of how consumers react to a change in price. Demand for a good that is very sensitive to changes in price is elastic. –Examples: Coffee, coke, pop. Elasticity of Demand

Factors Affecting Elasticity 1. Substitutes –few demand will not change - inelastic – heart RX –Many substitutes – elastic (margarine brands, bread) 2. Relative importance –Small % of budget – inelastic (toothpaste) –Eating out – larger % of budget - elastic

Factors Affecting Elasticity 3. Necessities vs. Luxuries  Necessity demand will not change – inelastic – food  Appendectomy – inelastic – can increase fee by 20% and still will have it  Luxury - diamonds 4. Change over time – longer time to find substitutes – elastic (electricity to natural gas)

Total Revenue  A company’s total revenue is the total amount of money the company received from selling its goods or services.  Total revenue = Price X Quantity  Firms need to be aware of the elasticity of demand for the good or service they are providing.  Elastic – Increase in price causes a decrease in total revenue or quantity purchased  Inelastic – Decrease in price causes an increases/or stays the same in total revenue or quantity purchased