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

2. Markets
Groups of buyers & sellers [demand & supply] who allocate scarce resources
Invisible hand “regulates” markets
Those with the highest relative value on goods receive them
Inefficient producers forced to leave the market

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. Demand Schedule Ice-Cream Cone Market Px ↓ => Qty D↑
(used to construct a demand curve)
Ice-Cream Cone Market
Price
$3.00
2.50
1. A decrease
in price
...
2.00
1.50
Px ↓ => Qty D↑
1.00
0.50 D1 1 2 3 4 5 6 7 8 9 10 11 12
Quantity 2.
...
increases quantity
demanded

5. Law of Diminishing Marginal Utility
Utility: means satisfaction
Marginal Utility: The amount of satisfaction a person gets
from one additional unit of a product
Law of Diminishing Marginal Utility
As more units are consumed => additional satisfaction declines

6. Marginal Utility Worksheet
How much would YOU pay for 1 donut?
How much would YOU pay for 12 donuts?
Marginal Utility

7. Why the D-Curve slopes downward
1) Law of Diminishing Marginal Returns (utility)
2) Substitution Effect- ∆ in Qty D resulting from a ∆ in relative price of other goods
3) Income Effect- ∆ in Qty D resulting from a ∆ in purchasing power (real income)
Price
∆ = Change D
Quantity

8. Key Terms for S&D Unit Income => Demand Normal Good- Income
Inferior Good-
=> Demand
Substitute-
Goods which can “replace” other goods
Soda & Water
Px good A
=> Demand good B
Compliment-
Goods which “go together” (are needed to use the other)
Px good A
=> Demand good B
Gas & Cars

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. Supply Curve
Price
Qty S1

11. Equilibrium: when Demand equals Supply
You must label ALL points on graphs to receive credit
Price
T-Shirts S1 P1 E1 D1 Q1
Qty

12. Market Demand Curve
When price is $2.00, Catherine demands 4 ice-cream cones
When price is $2.00, Nicholas demands 3 ice-cream cones.
The market demand at $2.00 will be 7 ice-cream cones. +
Catherine’s Demand
Nicholas’s Demand =
Market Demand
The market demand curve is the sum of the individual demand curves!
Price
Price
Price
2.00
2.00
2.00
1.00
1.00
1.00 7 13 4 8 3 5
Qty
Ice Cream Cones
Qty
Ice Cream Cones
Ice Cream Cones
Qty