1. The Marketplace: Demand

2. What is the Marketplace? A market is any place that buyers and sellers meet to voluntarily exchange goods and/or services. Can be local, national, international, or any combination.

3. Government’s role in a market For a Market to work, the government must provide:  Law and Order – Enforcement of Property rights, prevention of fraud, etc…  Standards of Measure and Money – people must have standard measures, and an established medium of exchange

4. What is Demand? Demand is a schedule of prices and the quantities buyers would be willing and able to take from the market at those prices. Law of Demand: Price and the quantity demanded are inversely related. (As one goes up, the other goes down.)

5. Demand Curve Quantity of Sodas demanded Price of a Soda

6. Demand Curve

7. Law of Demand Why?  Income Effect: with a fixed income you can buy more at lower prices  Substitution Effect: As the price increases you will seek to substitute other cheaper goods for it.  Law of Diminishing Marginal Utility: As you get more of a good, its utility decreases with each additional unit. (One hot dog vs. 12 hot dogs)

8. Demand Determinants Other than price, what determines Demand?  Tastes and Preferences (Can’t sell pork rinds in Jerusalem!)  Number of consumers  Incomes of consumers (can’t sell for more than people have)  Substitute Goods ($4 Pepsi vs. $1.50 Coke)  Prices of complimentary goods ($4/gallon gas will affect SUV sales)  Expectations (No one wants a Play-Station 2 when they announce PS3 release) If each of these remains constant, then Demand is set by the price.

9. What causes a shift? Anytime one of the other factors, other than price, changes. Examples?

10. Elastic Demand Price Elasticity of Demand  Explains how the demand for a good will change with a change in price. What determines how elastic demand for a good will be?  Availability of substitutes  Importance of the product in a consumer’s budget  Time period allowed for adjustment

11. Perfectly Elastic Demand What good would fit into this category?  Infinite substitutes  No difference between products Farmer John’s wheat harvest Very Rare

12. What good would fit into this category?  No substitutes Poncho’s at a rainy football game Sweatshirts at a suddenly cold baseball game. Very rare

13. Elastic Demand This is what you usually get  Almost always a substitute  People adjust in time