Microeconomics

• Demand is how much of a product or service consumers want.
• Supply is how much of a product the market can offer.

The law of demand states that when the price of a good goes up, consumers buy less of that good. When the price of an item goes down, consumers buy more. The law of supply states that when the price goes up, more is produced. When the price goes down, less is produced.

• The price of an item will rise when that item is scarce but many people want it.
• The price of an item will fall when there is a large amount of that item but little consumer demand.

There are two different effects, the substitution effect and the income effect, if the price of a good increases. The substitution effect explains how a change in the price of a good affects demand compared to other goods.

A good is more expensive than alternative goods when its price increases; therefore, consumers may switch to a cheaper, sometimes inferior, good. For example, if steak increases in price, consumers may switch to hamburger.

The income effect explains how a change in demand for a good is affected by a change in disposable income. An increase in price reduces disposable income, and this lower income reduces demand. Consumers spend less in general, and they may buy goods of higher or lower value.

As an example, if the price of college tuition rises, this increase reduces disposable income. Therefore, demand will fall. A consumer may still purchase lobster take-out meals but do it once a month instead of once a week.

Marginal utility is the benefit gained from consuming one additional unit of a good or service. The law of diminishing marginal utility states that the first unit of consumption of a good or service has more use than the following units of consumption. For example, a second candy bar, in general, is less satisfying than the first candy bar.