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Supply and Demand The Heart & Soul of Market Economics T-Shirts 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 T-Shirts 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