The GENERAL RULE in the Market Economy is… TT he more SCARCE a product is the higher the price will be for that product.

What will you do for it?  Demand is the desire to purchase a particular item or service at a specified price and time, accompanied by the ability and willingness to pay.

The Law of Demand  The Law of Demand: pricedecreasesquantity demanded will increase – As the price of an item decreases the quantity demanded will increase – The quantity demanded varies inversely with the price. Law of Demand: As Price, Demand Inversely: As price, Demand

How much do you make a year? II ncome Effect PP urchasing Power –A–Any change in this purchasing power is called the income effect. –L–Let’s put these terms into context. You guy’s like pizza?

Income Effect & Pizza money income If you take home $36 a week from a Saturday job, your money income is $36 per week. Suppose you spend all your income on pizza, buying four a week at $9 each. What if the price drops to $6? At that price you can now afford six pizzas a week. money income real income- that is, your income measured in terms of how many goods and services you can buy Your money income remains at $36 a week, but the decrease in price has increased your real income- that is, your income measured in terms of how many goods and services you can buy. The price reduction, other things constant (ceteris paribus), increases the purchasing power of your income, thereby increasing your ability to buy pizza and, indirectly, other goods. The quantity of pizza you demand likely will increase because of this income effect of price change. You may not increase your quantity demanded to six pizzas, but you can now afford six. If purchase five pizzas a week when the price drops to $6, you still have $6 left to buy other goods.

What is a demand schedule?  A table allowing you to graph the demand information.  The variables have an inverse relationship

Demand schedule for Ice cream Cones  Price per cone .50  75  $1.00  $1.25  $1.50  $1.75  $2.00  Quantity Demanded  190  175  125  85  65  50  40

The Big Question :  At what price would a producer make the most money?

I can’t get no…marginal utility?  Utility is the measure of satisfaction one gets from the use of a good or service.  Marginal utility:  Marginal utility: the satisfaction one gets from each additional purchase of a product or service.

Law of Diminishing Marginal Utility  The more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit…ceteris paribus.

Elastic & In-Elastic Goods  Elasticity: the percentage change in demand that follows a price change.  The more demand expands or contracts after a price change, the greater its elasticity. Can you give me an example of an elastic good And an in-elastic good?

How far will it stretch?  1. Luxury items  2. The price is a large portion of the families income.  3. It can be easily substituted for.  4. The item is durable.

 The demand schedule is a table showing the varying demand for an item at a different price.  This schedule can then be graphed. Price on the y-axis, and Nuggets on the x- axis

Shift in Demand  Changes in the market can cause a shift in demand  This shift is not triggered by price changes, but by something else…  What would cause a shift in demand (people would want more…or less of an item) for ….?... – Let’s work this one out as a class.

Shifting Away!!  The shift of the curve means a different price at each quantity demanded.  Increase – Shift to the right  Decrease – Shift to the left

Where did this shift come from?  Determinants of Demand! – Consumer tastes and preferences Bargain DVD rack at Best Buy – Market size China’s toilets – Income Post WWII – Prices of related goods Substitute vs. Complementary Goods – Consumer expectations Tax time…