2. The Market Forces of Supply and
Demand
●Supply and demand are the forces that make
market economies work.
●A market is a group of buyers and sellers of a
particular good or service.
●The terms supply and demand refer to the
behavior of people . . . as they interact with
one another in markets.
3. The Market Forces of Supply and
Demand
Buyers
determine
demand.
Sellers
determine
supply
4. What Is Demand?
● Demand is the willingness and ability of
buyers to purchase different quantities of a
good, at different prices, during a specific
time period.
Both willingness and ability must be present; if either
is missing, there is no demand.
● Quantity demanded is different from
demand. Quantity demanded is the
AMOUNT of a good that buyers are willing
and able to purchase.
Quantity demanded is always a number.
5. The Law of
Demand
● What happens to
the quantity
demanded when
the price
changes
● When the price
goes up, the
quantity
demanded goes
down—and
when the price
goes down, the
7. The Law of
Diminishing
Marginal Utility
What happens
to your level of
satisfaction as
you buy more
and more units
of the same
good?
Testing the
8. TRANSPARENCY 4-2: Diminishing Marginal Utility
●Diminishing means
decreasing
●Marginal means
additional
●Utility means
satisfaction
The law of diminishing marginal utility states:
As a person consumes additional units of a good, eventually the
utility gained from each additional unit of the good decreases.
9. The Law of Demand : A Visual
● The table of numbers is called a schedule and the
graph is called a curve.
● We use the graph to help simplify the complicated
aspects of demand.
13. Individual and Market Demand Curves
We can look at individual or market demand
curves; which are different.
● An individual demand curve represents
one person’s demand for a good.
● A market demand curve is the SUM of all
the individual demand curves for a good.
17. Change in Quantity Demanded
A direct price change affects the quantity
demanded of that good. It does not affect
demand.
Because of a change in price of the GOOD BEING
GRAPHED
Results in movement along the demand curve. NOT A
SHIFT.
Remember: Demand and quantity demanded are
not the same thing.
18. 0
D
Price of Ice-
Cream
Cones
Quantity of Ice-Cream Cones
A tax that raises the
price of ice-cream
cones results in a
movement along the
demand curve.
A
B
8
1.00
$2.00
4
Changes in Quantity
Demanded
19. Change in Demand
● Results in a shift in the demand curve, either
to the left or right.
● When demand goes up, the demand curve
shifts to the right. When demand goes
down, the demand curve shifts to the left.
● Results from a change in a determinant of
demand ( a ceteris paribus variable)
21. 5 Factors Cause Demand
Curves to Shift
1. Change in Consumer Income. As a
person’s income changes, he or she may buy
more or less of a certain good.
● As income increases the demand for a normal
good will increase.
● As income increases the demand for an inferior
good will decrease.
● If demand does not change even though income
does, the good is a neutral good.
22. $3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones0
Increase
in demand
An increase
in income...
D1
D2
Consumer Income
Normal Good
23. $3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones0
Decrease
in demand
An increase
in income...
D1D2
Consumer Income
Inferior Good
24. 2. Change in the Prices of Related Goods.
When two goods are substitutes, the
demand for one moves in the same direction
as the price of the other.
Example: Price of peanuts goes up,
demand for pretzels goes up.
When two goods are complements, the
demand for one moves in the opposite
direction of the price of the other.
Complements are goods used together.
Example: Price of tennis rackets goes up,
demand for tennis balls falls.
25. 3. Change in the Number of Buyers: A change
in the number of buyers, either an increase or a
decrease, can change demand.
4. Change in Expectations or Future price:
Buyers’ expectations of future prices can cause
them to buy now or wait to buy. Both actions
affect current demand.
5. Change in Preferences: Changes in
preferences cause changes in demand.
The only factor that affects quantity
demanded is a direct price change of the
good. Remember: Demand and quantity
demanded are not the same thing.
28. What Is Elasticity?
● Elasticity measures how a price change
affects the quantity of a particular good
that people want to buy.
29. Elasticity of Demand
● Demand for a good can be elastic, inelastic, or unit-
elastic.
● Elastic means that a price change has a
significant impact on the quantity demanded.
● Inelastic means that there is a minor change in
quantity demanded when the price changes. And
● Unit-elastic means that the impact of a price
change is neutral—that is, neither major nor minor.
32. 4 Factors of Elasticity
1.Number of substitutes. When there are few substitutes for a
good, the quantity demanded is unlikely to change much if the price
rises. Therefore, the demand for the good is likely to be inelastic.
● When there are many substitutes for a good, the opposite is
true: the demand tends to be elastic.
Why pay more when you can switch to the substitute?
2. Luxuries versus necessities. Demand for necessities
tends to be inelastic because people need those goods even if prices
rise. Demand for luxuries tends to be elastic because people will often
do without those goods if prices rise.
33. 3. Percentage of income spent on the good.
If a good requires a large percentage of a person’s income,
demand for it tends to be elastic.
Too much of the consumers buying power is tied up in the
purchase to ignore price.
Demand for goods that require a small percentage of a
person’s income tends to be inelastic.
4. Time. When consumers have little time to respond to a price
change, demand is usually inelastic. When they have more time
to respond, demand is usually elastic.
34. Relationship Between Elasticity and
Revenue● Elasticity of demand matters to sellers of goods because it
relates to their total revenue
● Price x Quantity Sold= Total Revenue
● You can look at how the elasticity of a good affects revenue
when sellers change the price of a good
● Elastic demand (think LUXURY) and an increase in price lead
to a decrease in total revenue.
● Elastic demand (think LUXURY) and a decrease in price lead
to an increase in total revenue.
● Inelastic demand (think NECESSITY) and an increase in
price lead to an increase in total revenue.
● Inelastic demand (think NECESSITY) and a decrease in price
lead to a decrease in total revenue.
