Transcript Understand Economics and Economic Systems 02.00

2.02 Supply and Demand
02.00 Understand Economics and Economic Systems
02.02 Interpret supply and demand graphs
Marketplace
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In a free market,
consumers determine
the demand of a
product.
Entrepreneurs see
the demand and
make more of the
product.
More supply causes
the price to decrease
as the demand is
fulfilled.
The Profit Motive
People and businesses enter the
marketplace in hopes of making a
profit (money).
 This “profit motive” encourages
people to enter the marketplace.
 This hope of making a profit is the
reward for people who take risks by
entering the marketplace.
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Competition is sparked
Sellers compete to make a profit
 If a person sees that they can meet a
need or a want, they enter the
marketplace
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They compete with other businesses
already meeting the need or want.
OR
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They make a new product and competition
follows when others enter the marketplace.
Prices tell businesses what to
produce
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The prices of goods and services dictate
what products are developed, made,
improved or modified.
When the price is high, demand falls and
businesses produce fewer goods.
When the price is low, demand rises and
businesses produce more goods to meet
the demand.
Supply vs. Demand
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Supply- the amount Producers are
willing and able to produce and sell
- Seller’s Market
Demand- the Customer’s
willingness and ability to buy the
products
- Buyer’s Market
Supply Defined
How much of a good or service a
producer is willing and able to
produce at different prices.
 Supply is produced by the
businesses in hopes of making
money.
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Supply
Dollars
$40.00
$30.00
$20.00
$10.00
100
200
300
400
500
Quantity
The law of supply
Price of a product increases, quantity
of supply increases
 Price of a product decreases, quantity
of supply decreases
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Demand Defined
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An individual’s need or desire for a
good or service at a given price.
Individuals are willing to consume more
of product or service at a lower price.
When the demand is high, competitors
see opportunity in the market.
The law of demand
Price of a product increases,
consumer demand decreases
 Price of a product decreases,
consumer demand increases
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Demand
Dollars
$40.00
$30.00
$20.00
$10.00
100
200
300
400
500
Quantity
Supply and Demand Graphs
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People draw supply and demand graphs so
that they can easily see the relationship
between the supply and the demand.
A supply and demand graph is a visual
representation of supply and demand.
The graph shows changes in a product’s
demand or supply.
The graph can help predict the performance
of the product over time.
When Supply and Demand Meet
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The point at which the supply and demand
curve meet is known as the equilibrium
price and quantity.
When the price is above the equilibrium
price, fewer people are willing to buy—the
price is too high.
When the price is below equilibrium price,
many people are willing to buy a lot of the
product—the price is too low. Suppliers
may not be able to make enough money
to cover costs.
Equilibrium Price (Market Price)
Supply
Curve
Equilibrium
Price
Equilibrium/
Point
Equilibrium Quantity
Demand
Curve
When does equilibrium occur?
Supply = Demand
 Producer and Consumer are satisfied
on the same price
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When does surplus occur?
Supply exceeds demand
 Prices are too high
 Consumers buy competitor’s product
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When does shortage occur?
Demand exceeds supply (scarcity)
 Customers purchase products
regardless of the price
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Elasticity is…
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Elastic demand changes as demand
changes
- Example: Cheeseburger
Inelastic demand rarely changes as
demand changes
- Example: Gasoline
Elastic Demand
Dollars
$40.00
$30.00
$20.00
$10.00
100
200
300
400
500
Quantity
Inelastic Demand
Dollars
$40.00
$30.00
$20.00
$10.00
100
200
300
400
500
Quantity
What might affect elasticity?
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Availability of substitutes
Brand loyalty
Price relative to income
Luxury vs. necessity (want vs. need)
Urgency of purchase