Eco 7/1

Demand

The Marketplace

• In a market economy, consumers influence price of all goods and services.

• People decide what to buy and at what price- demand.

• Sellers decide how much to sell and at what price- supply.

• Market- anyplace where buyers and sellers come together. Local, national, international

Voluntary Exchange

• Buyer and a seller agree on a price. Each feels he’s better off- richer, happier.

• A supply and demand analysis explains how buyers and sellers operate in the marketplace.

The Law of Demand

• Demand represents all the different quantities of a good or service that consumers will purchase at various prices.

• Demand is the desire to purchase AND the ability to pay for it.

Law of Demand

• Law of Demand explains how people react to changing prices in terms of quantities demanded of a good or service.

• Law of Demand: As price goes up, quantity demanded goes

down.As price goes down, quantity demanded goes

up.

Quantity Demanded

• Quantity demanded: “How much people will buy at any given price.”

There is an inverse (opposite) relationship between price and quantity demanded.

If one goes up, the other goes down.

Quantity Demanded

• Factors that explain the inverse relationship between price and quantity demanded include:

1. Real income effect

2. Possible substitutes

3. Diminishing marginal utility

Real Income Effect on Demand

• You can’t keep buying the same quantity when the price rises and your income stays the same.

• If you keep buying, your real income (purchasing power) is reduced.

Substitution Effect

• Two items nearly the same that fill the same basic want.

If the price of one rises, quantity demanded for the other rises.

If the price of one falls, quantity demanded for that one will rise; for the other one will fall.

Substitution Effect

• French Fries • Onion Rings

Utility

• Utility- the amount of satisfaction derived from a good or service.

Based on utility, people decide what to buy and how much of it.

Ex: Would you pay $5.00 for a Coke watching Vidalia play Toombs on a hot day?

Marginal Utility

• Marginal utility- amount of additional satisfaction you receive from each additional item.

Diminishing Marginal Utility

• Law of diminishing marginal utility- demand will diminish with each additional item.

Ex: You’ll pay $2.00 for the first Coke, but not for every one after that.