This document provides an overview of key concepts in demand and supply, including: - Definitions of demand as the amount willing and able to buy, and supply as the amount willing and able to sell. Both are impacted by price, consumers/producers, and time period. - Voluntary exchange occurs when buyers and sellers agree to terms of exchange through economic freedom. - The law of demand states that as price increases, quantity demanded decreases, and vice versa. - Other concepts covered include quantity demanded, real income effect, substitution effect, utility, marginal utility, and the law of diminishing marginal utility.

1. Chapter 7, Demand and
Supply
Section 1

2. Learning Goals
Explain how the principle of voluntary
exchange operates in a market economy.
Identify the law of demand.

3. Market
Anyplace where buyers and sellers come
together
– What is an example of a local market?
– A global market?
– A national/domestic market?
– A virtual market?

4. Demand
Amount of a good or service that
consumers are willing and able to buy at
various possible prices during a specified
time period
Factors of demand:
– Consumers willing and able
– Prices
– Time period

5. Supply
Amount of a good or service that
producers are willing and able to sell at
various prices during a specified time
period
– Factors of supply:
Producers willing and able
Prices
Time period

6. Voluntary Exchange
Transaction in which a buyer and a seller
exercise their economic freedom by
working out their own terms of exchange
– Buying a used car from a private party as an
example

7. Law of Demand
Economic rule stating that the quantity
demanded and price move in opposite
directions
As price goes up, quantity demanded
goes down
As price goes down, quantity demanded
goes up

8. Quantity Demanded
The amount of a good or service that a
consumer is willing and able to purchase
at a specific price

9. Real Income Effect
Economic rule stating that individuals
cannot keep buying the same quantity of a
product if its price rises while their income
stays the same
Price Income

10. Substitution Effect
Economic rule stating that if two items
satisfy the same need and the price of one
rises, people will buy the other
– Examples of substitute products?

11. Utility
The ability of any good or service to satisfy
consumer wants

12. Marginal utility
An additional amount of satisfaction

13. Law of Diminishing Marginal Utility
Rule stating that the additional satisfaction
a consumer gets from purchasing one
more unit of a product will lessen with
each additional unit purchased.
– Utility from 1 piece of cheesecake?
– Utility from 2nd piece?
– Utility from 6th and 7th?

14. 7.1 Quiz
1. What economic rule states that if prices rise,
but income stays constant, people cannot
continue to purchase the same amount of
goods?
2. What economic rule deals with 2 products that
both satisfy the same need?
3. What economic term describes the amount of
a good consumers are willing and able to buy
at a specified price at a given time?