1. 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.

2. 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.

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

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

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

6. 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

7. The Demand Curve
Demand vs. Quantity Demanded

8. 3 Factors that explain the inverse relationship between price and quantity demanded:
Real Income Effect
Substitution Effect
Diminishing Marginal Utility

9. 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.

10. 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

11. 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.

12. 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.

13. Just one more!
Price cuts can increase demand!

14. 7.3: The Law of Supply

15. 7.4 Equilibrium Price