Chapter 7: Demand & Supply Objective: Define the basic principles of the two most important laws in economics; the law of supply and the law of demand.

Voluntary Exchange What to charge and how much to pay is solved voluntarily in the market exchange between the buyer and the seller. Supply and demand analysis of this exchange is a way of explaining cause and effect in relation to price.

Buyers vs. Seller Think of buyers as DEMAND and sellers as SUPPLIERS

Demand Unless people are willing & able to buy something based on satisfaction, utility, or use, there is NO DEMAND for it.

DEMAND SCHEDULE All the different quantities of a good or service that consumers will purchase at various prices.

Law of Demand If price goes up, demand goes down If price goes down, demand goes up There is an INVERSE relationship Demand and Price move in OPPOSITE directions Think about the impact of price on a person’s willingness and ability to purchase an item - Super Bowl Tickets

The Demand Curve Demand vs. Quantity Demanded

3 Factors that explain the inverse relationship between price and quantity demanded: Real Income Effect Substitution Effect Diminishing Marginal Utility

Real Income Effect on Quantity Demanded As prices change, and your income stays the same, you have to make a substitution or trade-off Gas for Car $30 vs. $50 Your purchasing power decreases if gas prices rise.

Substitution Effect on Quantity Demanded Two items … not exactly the same but which satisfy basically the same need. Buying the lower priced item Coke vs. Pepsi Fresh Corn on the Cob or Green Beans Nike vs. Reebok

Diminishing Marginal Utility and its effect on quantity demanded Utility: the ability of a good or service to satisfy Based on utility, people decide what to buy and how much they are willing to pay.

Law of Diminishing Marginal Utility Total satisfaction will rise with each one bought. The amount of additional satisfaction, or marginal utility, will diminish or lessen with each additional hot dog.

Just one more! Price cuts can increase demand!

7.3: The Law of Supply

7.4 Equilibrium Price