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Supply and Demand The Heart & Soul of Market Economics (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 1 2 3 4 5 2. ... increases quantity demanded 6 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 Drawing a Demand Curve Price Decrease Qty Demanded increases Price Why demand slopes downward: 1) Law of Diminishing Marginal Utility 2) Substitution Effect Quantity Pizza & Happiness Utility = Satisfaction • 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 more 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 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 Equilibrium occurs when Demand = Supply T-Shirts Price -------------- E1 ------------- P1 S1 Q1 D1 Qty Worksheet • Graphing S & D for CD’s