2. I. The Circular Flow of Economic Activity A healthy market depends on a flow of resources, goods, and services

3. II. Expanding the Circular Flow You are involved in exchanges with multiple businesses! Producers (business owners) need not just labor, but land and raw materials –Also tools, machines

4. III. Supply and Demand Producers (buisness) and Individuals (buyers) act both as buyers and sellers Both are involved in exchanging goods and services In a Free Enterprise the Market Determines: –How much is being produced –The cost of a good or service

5. III. Supply and Demand Cont. When there is competition the market works according to the laws of supply and demand –What happens when people make choices!

6. –What determines the price of pizza, gasoline, a car wash, or other goods and services?

7. IV. The Law of Demand? tells us the quantity of a good that buyers wish to buy at each price As price of a good or service goes down the quantity consumers wish to buy will increase –Therefore, the demand curve is downward- sloping

8. The Daily Demand Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 8 2 16 3 12 Demand

9. Why do buyers purchase a greater quantity at lower prices and vice-versa? The substitution effect The income effect Law of Diminishing Marginal Utility (extra satisfaction)

10. V. Buyers and Sellers In Markets The Substitution Effect –The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes

11. The Income Effect –The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power V. Buyers and Sellers In Markets

12. Diminishing Marginal Utility –The change in the quantity demanded of a good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed V. Buyers and Sellers In Markets

13. Will the opportunity cost of producing additional units of pizza increase or decrease?

14. VI. Balancing Cost and Benefits A producer’s cost is determined by how much it costs to produce an item The price a buyer pays for each item = the benefit for the producer –The higher the price the better for the producer!

15. The Daily Demand Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 8 2 16 3 12 Demand

16. Why do buyers purchase a greater quantity at lower prices and vice-versa? The substitution effect The income effect Law of Diminishing Marginal Utility (extra satisfaction)

17. VII. Buyers and Sellers In Markets The Substitution Effect –The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes

18. The Income Effect –The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power VII. Buyers and Sellers In Markets

19. Diminishing Marginal Utility –The change in the quantity demanded of a good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed. VII. Buyers and Sellers In Markets

20. Will the opportunity cost of producing additional units of pizza increase or decrease?

21. Balancing Cost and Benefits A producer’s cost is determined by how much it costs to produce an item The price a buyer pays for each item = the benefit for the producer –The higher the price the better for the producer!

22. The Law of Supply the quantity of a good that sellers wish to sell at each price

23. The Daily Supply Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply

24. Market Price The Price at which buyers and sellers agree to trade

29. Buyers and Sellers In Markets Diminishing Marginal Utility –The change in the quantity demanded of a good that results because the amount of satisfaction gained by the consumer decreases with each additional unit consumed.