1. Mr. Barnett University High School 2012-2013

2. Nobody “sets” a price Nobody “sets” a quantity Prices determined through interactions between people Everybody places their own value on goods and services Thus, prices and values are separate concepts If people & countries all valued items the same there would be NO trade! Why sell my bobblehead if I value it at $10 and so did everybody else? Everybody has their own valuations and thus bid amount

3.  Let’s graph our auction to see DEMAND  Every point on curve represents a person and their valuation of the good or service  These points are the quantities demanded at various prices

4. Mind your P’s and Q’s Price on y-axis Quantity on x-axis Downward sloping from left to right Inverse relationship between price and quantity As price goes down, quantity demanded goes up As price goes up, quantity demanded goes down

5.  Quantity Demanded – the amount of a good that buyers are wiling and able to purchase  The Law of Demand:  The quantity demanded of a good falls when the price of the good rises, ceteris paribus  The quantity demanded of a good rises when the price of the good falls, ceteris paribus

6. HUGE difference between quantity demanded and demand At $____, the quantity demanded is _____ units If price drops from $____ to $______, the quantity demanded goes from _____ units to ____units. However, demand stays the same Demand is the entire curve Quantity demanded represented by each point A change in price ONLY causes movement along the curve!

7. Therefore, when prices change you go from one point to another on the demand curve But, change in price DOES NOT change demand Demand is represented by the ENTIRE curve Think about this statement If price changes from $_____ to $______, demand goes from ______to ______ units.

8.  So what is a market exactly….  Market – a group of buyers and sellers of a particular good or service  Competitive Market – a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

9.  The entire demand curve can also be understood as a market demand curve  At any given price, the market demand is the sum of individual quantities demanded  Sum of horizontal individual demand curves  The total quantity demand for Kit-Kat bars At $3 Cara wants 5 at $3, Chexi wants 2 at $3 Cara’s quantity demanded at $3 + Chenxi’s quantity demanded at $3 5+2 = 7 Kit-Kat bars…..market demand curve will have total quantity demanded point at 7 Kit-Kat bars for $3

10. There are three reasons why the demand curve is downward sloping Income Effect Everybody has limited resources to purchase goods and services Even the millionaires…just ask Mike Tyson or MC Hammer Thus, we all budget a certain amount of our income for our wants and needs How much would you be willing to spend on homework passes? Budget did not change Price of good changed As price fell, quantity demanded increased As price rose, quantity demanded decreased Substitution Effect Diminishing Marginal Utility

11. There are three reasons why the demand curve is downward sloping Substitution Effect As the price rises for a particular good or service relative to the price of another good, than the quantity demanded falls for that particular good Vice versa, as the price drops for a particular good or service relative the price of another good, then the quantity demanded rises for that particular good People will always substitute a higher priced good for a lower one if they are comparable and their income stays the same Real Nominal Principle What matters to people is the real value of money or income -its purchasing power-not its “face” value

12. Diminishing Marginal Utility Marginal – Additional Utility – Satisfaction So, diminishing marginal utility is the additional satisfaction one gets from consuming a good or service  In consumption: Eating too many Twinkies make you sick and your enjoyment from the Twinkies diminishes  In production: Too many workers but not enough machines generate idle workers and diminished returns  The only way a firm can convince you to purchase/consume more and more of a good or service is to lower the price  Hostess wants you to eat 1 more Twinkie! So they will lower the price

13. The demand curve is an illustration of the quantity demanded at various prices. A change in price changes quantity demanded and not demand