Supply & Demand #2: Law of Demand Remember… • Consumers want to maximize their utility (satisfaction) Demand • What consumers are WILLING (want) & ABLE (have the ability) to buy at a possible price during a given a period • Quantity demanded: amount demanded Would you buy this for…..? • $5? • $3? • $1? Law of Demand • Quantity demanded varies inversely (opposite) w/ price: – Price goes up, demand goes down – Price goes down, demand goes up • If pineapples go on a sale, what happens to the quantity demanded? Factors of Demand: • Substitution Effect – goods and services that can used to meet your demands – EX: both steak and chicken can meet your need for food. Which one has a higher quantity demanded? Pepsi: $1 Coke: 75 cents Which one will have a higher quantity demanded? Income Effect • Money income: # of dollars in a given period • Real income: what you can actually purchase w/money income – If prices remain increase & your money income is the same – you will demand less (your real income is reduced) Diminishing Marginal Utility • Marginal Utility: extra satisfaction from each additional unit • More you consume – your marginal utility diminishes (reduces) – Why don’t you watch 3 movies on 1 night? – Why don’t you take 2 copies of the same newspaper? Question time! • Cupcakes cost $1.50 a piece and doughnuts are selling for 85 cents each. Which one will have a higher quantity demanded? • These two products are called what…?
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