Chapter 7 Section 1 Demand

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Demand Amount of a good or service that consumers are willing AND able to buy at various possible prices. Someone who is willing but NOT able to buy a good or service has NOT created a demand for a product.

Supply Amount of a good or service that producers are willing AND able to sell at various prices.

Markets Free interaction between buyers and sellers involving Voluntary Exchange. What? How? And For Whom? (Decided by individuals and businesses)

The Law of Demand Economic rule stating that the quantity demanded and price move in opposite directions (Inverse relationship)

The Law of Demand 3 Factors help explain why we have the Law of Demand.

Real Income Effect Individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same. Example – Gas prices go up and your income is the same – you have to pay for that gas somehow meaning that you must make a trade-off and purchase less of something else.

Substitution Effect If two items satisfy the same need and the price of one rises, people will purchase more of the other good. Example - CD’s versus Downloading Music

Utility Utility – Satisfaction gained from a product or service

Diminishing Marginal Utility The additional satisfaction a consumer gets from purchasing one more unit of a product will diminish (lessen) with each additional unit purchased.