Supply and Demand In a market economy (the one we will be studying from now on) the engine that drives it is supply and demand

every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.- Adam Smith

Translated People are selfish…. and that’s a good thing.

Merry Christmas Giving might be better than receiving but to an economist giving gifts is economically inefficient. Why? Let’s say your grandmother buys you a sweater. What she paid for itWhat you would have paid (maybe) The Lesson= giving a gift resulted in a $45 net loss in value. … stop giving gifts

Demand Curve Negative Relationship As price goes down demand goes up. As price goes up demand goes down

Demand Shifters… nothing to do with price.  T.I.M.E.S.  Taste  Income  Market  Expectations  Substitutes

Demand Shifters… nothing to do with price.  Change in income- less money less spend  Change in number of consumers- more people= more demand (duh)  Change in preferences…I used to like it but not anymore.  Change in expectations-a new game system is coming out  Change in substitute goods. a  Change in complementary goods

Left is lower…

Complement or Substitute? Complement or Substitute?

Elasticity Some goods have little change in demand no matter how high the price goes- inelastic demand Examples:

Law of Supply Positive Relationship When price increases supply increases When prices decreases supply decreases

Graph the following…

Equilibrium Goal of a Market Economy is to reach equilibrium. Prices too high people won’t buy.