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Chapter 6: Demand, Supply & Markets What is a Market? • Any network that brings buyers and sellers together so they can exchange goods and services • Doesn’t have to be a physical place, but can be done over the internet, phone or fax • Exists wherever supply and demand determine the price and quantity of goods and services sold Demand • Is the quantities of a good or service that buyers are willing and able to purchase at various prices • Demand schedule shows the various prices and quantity demanded at each price • Economists consistently will gather data and put it into a schedule and then to make it visually easier to understand put the schedule into graph form Demand • Law of Demand: An increase in price will cause a decrease in quantity demanded The Demand Curve P$ D 0 Q Quantity Demanded Law of Diminishing Marginal Utility • Each additional unit of a good or service that is consumed brings less satisfaction or “utils” than the previous unit consumed • This helps explain why the demand curve is downward sloping Elasticity of Demand • Shows the responsiveness of the quantity demanded to a change in price • P x Qd = TR (total revenue) • Elastic Demand - % P < Qd • Inelastic Demand – % P > Qd • Unitary Demand - % P = Qd • Let`s look at page 117 for an example FACTORS EFFECTING ELASTICITY OF DEMAND – # of substitutes (e.g. margarine and butter) – small items in a budget (e.g. pepper, salt) – essential items (e.g. water, electricity, natural gas) – time (e.g. gasoline) Applications of Elasticity of Demand • the more inelastic an item the more heavily it can successfully be used to raise tax revenue (e.g. cigarettes, gas & alcohol) Effect of an Increase in Demand P$ D D1 0 Q Quantity An Increase In the Demand for Melons P$ D D1 $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Demanded (000’s) 10 15 20 25 Effect of a Decrease in Demand P$ D D0 0 Q Quantity Demanded A decrease In the Demand for Melons P$ D D0 $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 Your Turn • Complete page 119 #1,2,4,5