Markets

• Markets – exchanges between buyers and sellers.

• Supply – questions faced by sellers in those exchanges are related to how much to sell and at what price.

• Demand – questions faced by buyers – the amount of goods and services consumers are willing to buy at various prices at a particular time and place.

The Law of Demand

• If all other things are equal, the higher the price of a product or service, the less of it people are willing to buy.

• The lower the price, the more people will buy.

• Based on the connection between the price of a good or service and the quantity demanded.

Graphing the Law of Demand

• Demand Schedule – list that shows the quantities demanded of a product a various prices during a particular time period.

• Demand Curve – Each point on the graph shows the quantity purchased at a particular price. The line formed by connecting the points is called a demand curve.

• Downward slope shows a negative relationship- as one variable increases, the other decreases.

Why Demand Rises and Falls

• Real Income Effect – what people can actually buy with their money; if prices rise and your income stays the same, you are no longer able to buy as much as you once did.

• Substitution Effect – when prices increase people tend to choose a similar product in their price range.

The Law of Diminishing Marginal Utility(Returns)

• of Diminish – to grow smaller.• Utility – usefulness of a product or the amount of

satisfaction it provides.• Marginal Utility – the extra usefulness or satisfaction

people get from buying or using more of a product or service.

• As people use more of a product or service, the satisfaction they get from their additional purchases declines.

• People not willing to pay as much for the second, third, or fourth.

• When it gets to the point where the marginal utlility is less than the price the item, he or she stops buying.

Vocabulary

• Market• Supply• Demand• Law of Demand• Law of Diminishing

Marginal Utility

• Demand Schedule• Demand Curve• Real Income Effect• Substitution Effect

Analyzing Market Demand

• A demand curve starts with preferences of individual buyers.

• Points along the curve show your willingness and abilityu to buy a good or service at a particular price.

• Market Demand – total of all of the individual demands with a market.

• When curve shifts to the left –decrease in demand

• Shifts to the right – increase in demand.

Causes of Shifts in Demand

• Price• Average Income• Changes in Population• Changes in Complementary products; complements are

products or services that are used together.• Substitutes

• Changes in personal preferences.• Special influences.• Fads • Expectations about the future.

Putting It All Together

• Work with a partner to list the brand names of ten goods you use.

• Next, try to identify a complementary product and a substitute for each. Then predict what would happen to the demand for your favorite item or brand and its complementary products if the item doubled in price.

Demand Elasticity

• Elasticity - Consumers are more responsive to changes in the prices of some goods and services than others.

• Measure elasticity of demand by how sensitive consumers are to a change in price.

• Elastic – when a specific change in price causes a relatively large change in the quantity demanded.

• Inelastic – if a change in price does not bring much of a change in the quantity demanded.

Effects of Elasticity

• Elastic - some products are more elastic because they have more substitutes than others.

• Inelastic – products that have few substitutes tend to be inelastic.

• If the cost of an item represents a large percentage of a consumer’s real income, a change in the price will have a large effect on demand.

• Time – some items are inelastic in the short run, but elastic in the long run.

• Elasticity closely related to competition. The more choices the more competitive.

Putting It All Together

• List some items that you purchase regularly. Which are elastic in demand? Which are inelastic in demand?

• Explain how you decided which was which?