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Mr. Barnett
University High School
2012-2013
Nobody “sets” a price
Nobody “sets” a quantity
Prices determined through
interactions between people
Everybody places their own value on goods and
services
Thus, prices and values are separate concepts
If people & countries all valued items the
same there would be NO trade!
Why sell my bobblehead if I value it at $10 and so
did everybody else?
Everybody has their own valuations and thus bid
amount
 Let’s
graph our auction to see DEMAND
 Every
point on curve represents a person and
their valuation of the good or service

These points are the quantities demanded at
various prices
Mind your P’s and Q’s
Price on y-axis
Quantity on x-axis
Downward sloping from left to right
Inverse relationship between price and quantity
As price goes down, quantity demanded goes up
As price goes up, quantity demanded goes down
 Quantity
Demanded – the amount of a good
that buyers are wiling and able to purchase
 The


Law of Demand:
The quantity demanded of a good falls when the
price of the good rises, ceteris paribus
The quantity demanded of a good rises when the
price of the good falls, ceteris paribus
HUGE difference between quantity
demanded and demand
At $____, the quantity demanded is _____ units
If price drops from $____ to $______, the
quantity demanded goes from _____ units to
____units.
However, demand stays the same
Demand is the entire curve
Quantity demanded represented by each point
A change in price ONLY causes movement along
the curve!
Therefore, when prices change you go from
one point to another on the demand curve
But, change in price DOES NOT change demand
Demand is represented by the ENTIRE curve
Think about this statement
If price changes from $_____ to $______, demand
goes from ______to ______ units.
 So
what is a market exactly….
 Market
– a group of buyers and sellers of a
particular good or service
 Competitive
Market – a market in which
there are many buyers and many sellers so
that each has a negligible impact on the
market price
 The
entire demand curve can also be
understood as a market demand curve

At any given price, the market demand is the
sum of individual quantities demanded
Sum of horizontal individual demand curves

The total quantity demand for Kit-Kat bars At $3



Cara wants 5 at $3, Chexi wants 2 at $3
Cara’s quantity demanded at $3 + Chenxi’s quantity
demanded at $3
 5+2 = 7 Kit-Kat bars…..market demand curve will
have total quantity demanded point at 7 Kit-Kat bars
for $3
There are three reasons why the demand curve is
downward sloping
Income Effect
Everybody has limited resources to purchase goods and
services
Even the millionaires…just ask Mike Tyson or MC Hammer
Thus, we all budget a certain amount of our income for our
wants and needs
How much would you be willing to spend on homework
passes?
Budget did not change
Price of good changed
As price fell, quantity demanded increased
As price rose, quantity demanded decreased
Substitution Effect
Diminishing Marginal Utility
There are three reasons why the
demand curve is downward sloping
Substitution Effect
As the price rises for a particular good or service relative
to the price of another good, than the quantity demanded
falls for that particular good
Vice versa, as the price drops for a particular good or
service relative the price of another good, then the
quantity demanded rises for that particular good
People will always substitute a higher priced good for a
lower one if they are comparable and their income stays
the same
Real Nominal Principle
 What matters to people is the real value of money or
income -its purchasing power-not its “face” value
Diminishing Marginal Utility



Marginal – Additional
Utility – Satisfaction
So, diminishing marginal utility is the additional
satisfaction one gets from consuming a good or
service
In consumption: Eating too many Twinkies make you sick
and your enjoyment from the Twinkies diminishes
In production: Too many workers but not enough
machines generate idle workers and diminished returns
The only way a firm can convince you to
purchase/consume more and more of a good or service is
to lower the price

Hostess wants you to eat 1 more Twinkie! So they will lower the
price
The demand curve is an illustration of the
quantity demanded at various prices.
A change in price changes quantity
demanded and not demand