The Marketplace: Demand

What is the Marketplace? A market is any place that buyers and sellers meet to voluntarily exchange goods and/or services. Can be local, national, international, or any combination.

Government’s role in a market For a Market to work, the government must provide: Law and Order – Enforcement of Property rights, prevention of fraud, etc… Standards of Measure and Money – people must have standard measures, and an established medium of exchange

What is Demand? Demand is a schedule of prices and the quantities buyers would be willing and able to take from the market at those prices. Law of Demand: Price and the quantity demanded are inversely related. (As one goes up, the other goes down.)

Demand Curve

Law of Demand What causes Demand to act this way? Income Effect: with a fixed income you can buy more at lower prices Substitution Effect: As the price increases you will seek to substitute other cheaper goods for it. Law of Diminishing Marginal Utility: As you get more of a good, its utility decreases with each additional unit . (One hot dog vs. 12 hot dogs)

Demand Determinants Other than price, what determines Demand? Tastes and Preferences (Can’t sell pork rinds in Jerusalem!) Number of consumers Incomes of consumers (can’t sell for more than people have) Substitute Goods ($4 Pepsi vs. $1.50 Coke) Prices of complimentary goods ($4/gallon gas will affect SUV sales) Future Expectations (No one wants a Play-Station 2 when they announce PS3 release) If each of these remains constant, then Demand is set by the price.

What causes a shift? Anytime one of the other factors, other than price, changes. Examples?

Demand Curve Price of a Soda Quantity of Sodas demanded