1. Why is the theory of supply and demand considered one of the most fundamental concepts of economics?

The theory of supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. The supply and demand model describes how prices vary as a result of a balance between product availability and consumer demand. Since contemporary economies rely on the market forces of supply and demand instead of government forces to distribute goods and services there must be a method for determining who gets the products that are produced. This is where the laws of supply and demand begin to work. By themselves these laws give us basic information, but when working together they are the key to distribution in a market economy.

2. What is demand?

demand is comprised of people’s desire, willingness and ability to purchase particular amounts of goods or services at certain prices in a given period of time.

3. What factors alter consumer demand?

What factors alter a consumer’s desire, willingness and ability to pay for products? Some factors include consumers’ income and tastes, the prices and availability of related products like substitutes or complementary goods, and the item’s usefulness.

4. What goods are considered to be related?

? Some factors include consumers’ income and tastes, the prices and availability of related products like substitutes or complementary goods, and the item’s usefulness. .

5. What goods are called substitutes? Substitutes are goods that satisfy similar needs and which are normally consumed in place of each other. As the price of one substitute declines, demand for the other substitute will decrease. Butter and margarine are close substitutes. If the price of butter goes u

p, then people will be apt to substitute margarine for butter. 6. What are complementary goods?

Complementary goods are those that are normally consumed together (e.g., DVD players and DVD movies). An increase in the price of a product will diminish demand for its complement while a decrease in the price of a product will increase demand for its complement

7. What is the item’s usefulness?

Think of the item’s usefulness this way. It is a hot summer day and you are gasping for a drink*. You come across a lemonade stand and gulp down a glass*. It tasted great so you want another. This second glass is marginal utility meaning an extra satisfaction a consumer gets by purchasing one more unit of a product. But now you reach for a third glass. Suddenly your stomach is bloated and you are feeling sick. That means that the law of diminishing marginal utility comes into effect!

8. What does the law of diminishing marginal utility explain?

Think of the item’s usefulness this way. It is a hot summer day and you are gasping for a drink*. You come across a lemonade stand and gulp down a glass*. It tasted great so you want another. This second glass is marginal utility meaning an extra satisfaction a consumer gets by purchasing one more unit of a product. But now you reach for a third glass. Suddenly your stomach is bloated and you are feeling sick. That means that the law of diminishing marginal utility comes into effect!