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

3. 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.

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

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

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

7. 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

8. 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

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

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

11. 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

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