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

Will you buy a slice of Pizza? (used to construct a demand curve) Demand Schedule Demand Schedule Price Quantity $11.00 ______ $9.00 ______ $7.00 ______ $5.00 ______ $3.00 ______ $1.00 ______ Price 9.00 7.00 5.00 3.00 1.00 1 2 3 4 5 6 Quantity $11.00 2. ... increases quantity demanded D1 Pizza by the Slice Market Price ↓ => Qty D↑ 1. A decrease in price ...

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

Drawing a Demand Curve Why demand slopes downward: Price Quantity Why demand slopes downward: Law of Diminishing Marginal Utility Substitution Effect

Pizza & Happiness

Utility = Satisfaction 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 more unit of a product

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

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

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

Equilibrium occurs when Demand = Supply T-Shirts Price S1 D1 P1 -------------- E1 ------------- Q1 Qty

Worksheet Graphing S & D for CD’s