Chapter 6: Demand, Supply & Markets

What is a Market? Any network that brings buyers and sellers together so they can exchange goods and services Doesn’t have to be a physical place, but can be done over the internet, phone or fax Exists wherever supply and demand determine the price and quantity of goods and services sold

Demand Is the quantities of a good or service that buyers are willing and able to purchase at various prices Demand schedule shows the various prices and quantity demanded at each price Economists consistently will gather data and put it into a schedule and then to make it visually easier to understand put the schedule into graph form

Demand Law of Demand: An increase in price will cause a decrease in quantity demanded

The Demand Curve Price Quantity Demanded D P$P$ Q0

Law of Diminishing Marginal Utility Law of Diminishing Marginal Utility Each additional unit of a good or service that is consumed brings less satisfaction or “utils” than the previous unit consumed This helps explain why the demand curve is downward sloping

Elasticity of Demand Shows the responsiveness of the quantity demanded to a change in price P x Qd = TR (total revenue) Elastic Demand - % P < Qd Inelastic Demand – % P > Qd Unitary Demand - % P = Qd Let`s look at page 117 for an example

FACTORS EFFECTING ELASTICITY OF DEMAND –# of substitutes (e.g. margarine and butter) –small items in a budget (e.g. pepper, salt) –essential items (e.g. water, electricity, natural gas) –time (e.g. gasoline)

Applications of Elasticity of Demand the more inelastic an item the more heavily it can successfully be used to raise tax revenue (e.g. cigarettes, gas & alcohol)

Effect of an Increase in Demand Price Level Quantity D Q 0 D1D1D1D1 P$P$

An Increase In the Demand for Melons Price Quantity Demanded (000’s) 0 $1.00 $ $1.50 $2.00 $ P $ Q D D1D1D1D1

Effect of a Decrease in Demand Price Level Quantity Demanded D Q 0 D0D0D0D0 P$P$

A decrease In the Demand for Melons Price Quantity Supplied (000’s) 0 $1.00 $ $1.50 $2.00 $ P $ Q D D0D0D0D0

Your Turn Complete page 119 #1,2,4,5