Supply, Demand and Pricing in a Free Enterprise Economy Unit # 2: Supply, Demand and Pricing in a Free Enterprise Economy

TAKE 3 MINUTES AND JOT DOWN AN ANSWER FOR YOUR TABLE. If the US Government doesn’t set prices in our economy, where do the prices come from? TAKE 3 MINUTES AND JOT DOWN AN ANSWER FOR YOUR TABLE.

The Answer: Both buyers and sellers determine prices. Where they agree is where prices are set.

How do you respond to an increase in prices? Buy less Find substitutes

How do you respond to an decrease in prices? Buy more Buy more related goods/services

As price increases, demand decreases a person’s willingness and ability to buy a good or service THE LAW OF DEMAND: As price increases, demand decreases As price decreases, demand increases

Why does the “Law of Demand” work? WHAT IF…? TODAY: Vending Machine Drinks: $1.25 NEXT WEEK: Vending Machine Drinks: $3.25 THE SUBSTITUTION EFFECT: STOP buying from the machine bring a drink use the fountain INCOME EFFECT: How would this make you “FEEL”? “poorer” like you have to drink less

At your table, draw a diagram, graph or other visual representation of THE LAW OF DEMAND.

DEMAND: Schedules and Curves PRICE QUANTITY 10 $1 3 5 7 7 5 3 1 Price D1 10 Quantity

DEMAND: Schedule and Curve: for Pepsi Drinks PRICE QUANTITY $1 3 5 7 1 Quantity Price 10 D1 P2 P1 Q1 Q2 Q: Why do we need to look at these graphs? A: To see what happens when prices change

WHAT HAPPENS WHEN PRICES CHANGE? movement ON the demand curve, CETERIS PARIBUS nothing else is changing PRICE D QUANTITY