2
Unit 2: Demand & Supply
Text:
Economics for Today Chapter 3 and Supplementary Material
1
Market
Any situation that brings buyers and sellers together for exchange of good and services (g/s)
2
Example – Pizza market:
sellers comprise the individuals and firms that sell pizza – Supply
buyers include all individuals who buy, or might buy pizza - Demand
Does not have to be a physical place
e.g. EBay, foreign exchange market
A market occurs as long as buyers and sellers are in communication
Demand the economics of the consumer / buyer Demand
If you demand something, then you:
want it (willing)
can afford it
(able)
have made a definite plan to buy it
Demand reflects a decision about which wants to satisfy
6
Demand the quantity demanded of a particular g/s that consumers plan to buy at a particular price in a particular time period
Demand
The Law of Demand:
Other things remaining the same:
As price rises the quantity demanded falls
As price falls the quantity demanded rises
Exceptions:
e.g. status symbols
8
The Law Of Demand results from:
Substitution effect
When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded decreases.
10
Income effect
When the price of a good or service rises relative to income, people’s spending power falls, so the quantity demanded decreases. An Inverse Relationship
At the higher price consumers will buy fewer units, and at a lower price they will buy more units.
12
The Law of Diminishing
Marginal Utility
utility
- the satisfaction or enjoyment derived from the consumption of a good
Aim of the consumer is to maximise utility
As a person increases consumption of a good, the Marginal Utility they get from each additional unit of that good declines The MU of the second chocolate will be smaller than that of the first, and the MU of the third will be smaller still.
The MU of the tenth chocolate would likely be
Text:
Economics for Today Chapter 3 and Supplementary Material
1
Market
Any situation that brings buyers and sellers together for exchange of good and services (g/s)
2
Example – Pizza market:
sellers comprise the individuals and firms that sell pizza – Supply
buyers include all individuals who buy, or might buy pizza - Demand
Does not have to be a physical place
e.g. EBay, foreign exchange market
A market occurs as long as buyers and sellers are in communication
Demand the economics of the consumer / buyer Demand
If you demand something, then you:
want it (willing)
can afford it
(able)
have made a definite plan to buy it
Demand reflects a decision about which wants to satisfy
6
Demand the quantity demanded of a particular g/s that consumers plan to buy at a particular price in a particular time period
Demand
The Law of Demand:
Other things remaining the same:
As price rises the quantity demanded falls
As price falls the quantity demanded rises
Exceptions:
e.g. status symbols
8
The Law Of Demand results from:
Substitution effect
When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded decreases.
10
Income effect
When the price of a good or service rises relative to income, people’s spending power falls, so the quantity demanded decreases. An Inverse Relationship
At the higher price consumers will buy fewer units, and at a lower price they will buy more units.
12
The Law of Diminishing
Marginal Utility
utility
- the satisfaction or enjoyment derived from the consumption of a good
Aim of the consumer is to maximise utility
As a person increases consumption of a good, the Marginal Utility they get from each additional unit of that good declines The MU of the second chocolate will be smaller than that of the first, and the MU of the third will be smaller still.
The MU of the tenth chocolate would likely be