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

2. 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
...

3. 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

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

5. Pizza & Happiness

6. 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

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

8. 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

9. 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

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

11. Worksheet
Graphing S & D for CD’s