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Supply and Demand

Supply and Demand. The Heart & Soul of Market Economics. Wheat Trading Game. Adam Smith (1723-90). Free markets best promote the social welfare Markets are naturally “self regulating”. Markets: Allocate scarce resources Price: Determines “For Whom”

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Supply and Demand

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  1. Supply and Demand The Heart & Soul of Market Economics

  2. Wheat Trading Game Adam Smith(1723-90) • Free markets best promote the social welfare • Markets are naturally “self regulating” • Markets:Allocate scarce resources • Price: Determines “For Whom” • Supply & Demand: Determines “What is produced” • Buyers = Demand Sellers = Supply

  3. Pizza Worksheet $7 5 4 3 2 1 050 1 2 3 4 5 6

  4. 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

  5. Price Quantity Drawing a Demand Curve • Why demand slopes downward: • Law of Diminishing Marginal Utility • Substitution Effect

  6. 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

  7. Price Quantity Drawing a Supply Curve

  8. S1 -------------- P1 ------------- D1 Q1 Equilibrium occurs whenDemand = Supply T-Shirts Price E1 Qty

  9. Worksheet • Graphing S & D for CD’s

  10. $7 5 4 3 2 1 050 1 2 3 4 5 6

  11. Utility:means satisfaction Law of Diminishing Marginal Utility Marginal Utility: The amount of satisfaction a person gets from one additional unit of a product • As more units are consumed =>additional satisfaction declines

  12. Marginal Utility ↓ as Qty ↑ How should you price Donuts How much would YOU pay for 1 donut? How much would YOU pay for 12 donuts?

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