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

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

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

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

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

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

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

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

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

Supply Curve Price Qty S1

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

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