Transcript Intro to Supply & Demand

Supply and Demand
The Heart & Soul of Market Economics
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Price
S1
-------------
$10 --------------
200
E1
D1
Qty
Key Terms for S&D Unit
Normal Good-
Income
=> Demand
Inferior Good-
Income
=> Demand
Goods which can “replace” other goods
SubstituteSoda & Water
Compliment-
Px good A
Goods which “go together”
Px good A
Gas & Cars
=> Demand good B
(are needed to use the other)
=> Demand good B
(used to construct a demand curve)
Demand
Schedule
Will
you
buy a slice of Pizza?
Demand Schedule
Price Quantity
$11.00 ______
$9.00 ______
$7.00 ______
$5.00 ______
$3.00 ______
$1.00 ______
1. A decrease
in price ...
Pizza by the Slice Market
Price
$11.00
9.00
7.00
5.00
Price ↓ => Qty D↑
3.00
1.00
D1
0 3 5 7 9 11 13 15 17 19 21 23 25
2. ... increases quantity
demanded
Quantity
Demand
• The quantity of goods or services that consumers are
willing and able to purchase at various prices
Law of Demand
Price Decrease
Qty Demanded increases
Inverse Relationship
Utility
• Total Utility means the total satisfaction a person receives
when purchasing a good or service
• Marginal Utility: The amount of additional satisfaction a
person gets from one additional unit of a product
Law of Diminishing Marginal Utility
• As more units are consumed => additional satisfaction falls
Marginal Utility
Pricing Lessons of Diminishing
Marginal Utility
Give volume discounts:
Examples:
• a dozen donuts
• 3 T-shirts in a package
• “free” refills on large popcorn
Marginal Utility
3 reasons D-Curve slopes downward
• 1) Law of Diminishing Marginal Utility (returns)
• 2) Substitution Effect- change in Qty D resulting from a ∆
in relative price of other goods
• 3) Income Effect- change in Qty D resulting from a ∆ in
purchasing power (real income)
Price
∆ = change
D
Quantity
Supply
• The quantity of a product or service that a firm is willing
and able to sell at various prices
Law of Supply
Price increases
Qty Supplied increases
Positive Relationship
Supply Curve
Price
S1
Qty
Equilibrium:
when Demand equals Supply
You must label ALL points on graphs to receive credit
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P1
-------------- E1
-------------
Price
Q1
S1
D1
Qty
Market Demand Curve
When price is $2.00, Catherine
demands 4 ice-cream cones
Catherine’s Demand
When price is $2.00, Nicholas
demands 3 ice-cream cones.
+
Nicholas’s Demand
The market demand at $2.00 will be
7 ice-cream cones.
=
Market Demand
The market demand curve is the sum of the individual demand curves!
Price
Price
2.00
2.00
1.00
1.00
4
2.00
1.00
3
8
Ice Cream Cones
Price
Qty
7
5
Ice Cream Cones
Qty
Ice Cream Cones
13
Qty