Lesson 5
Businesses use supply and demand to decide what products to
produce and how to price products and services.
Producers and Consumers
 The economy of the United States is based on
providing consumers with the goods and services
they need and want.
 Consumers are the people who buy and use goods and
services.
 Producers are the people and businesses that provide
these goods and services for the consumers.
 The goods and services made available to consumers are
determined by supply and demand.
Supply and Demand
 Supply is the number of items ready for sale.
 Demand is the number of items consumers want to
purchase.
Supply Curve
 As prices increase, the
supply available also
increases.
 As prices decrease, the
supply available also
decreases.
 Direct relationship
Demand Curve
 As price of an item
increases, the quantity
demanded decreases.
 As the price of an item
decreases, the quantity
demanded increases.
 Indirect or inverse
relationship.
Law of Supply and Demand
The price of an item will go down if the supply
increases or the demand for that item decreases.
2. The price of an item will go up if the supply
decreases or the demand for that item increases.
1.
Equilibrium Price
 The price at the point
where they cross is
important because
consumers will demand
the same amount that
producers will supply at
that price.
 Market Clearing Price—
The price at which all of
the products or services
brought to market is
consumed.
Surplus and Scarcity
Surplus
Scarcity
 If the supply of an item is
 When the consumers’
greater than its demand by
consumers, then there is a
surplus of that item.
 A surplus causes the price of
the item to decrease.
demand for the item is
greater than the supply,
this results in a scarcity.
 Scarcity causes the price of
the item to increase.
Surplus
Supply
 The surplus in the graph
to the left is the triangle
space above the supply
curve and below the
demand curve.
Demand
Early Examples of Supply and
Demand
 Jamestown Colony prospered from tobacco
production.
 Tobacco sold for very high prices in England due to the
high demand for the product.

This encouraged settlers to plant more tobacco to take
advantage of the high prices.
Early Examples of Supply and
Demand
 In 1849, gold was discovered in California.
 People from all over the world rushed to CA to get rich
in the gold fields.
 With limited supplies of goods and services available
to the prospectors, the prices of items such as food,
lodging, and supplies skyrocketed.
Early Examples of Supply and
Demand
 After the Civil War, small farms operated by
sharecroppers and tenant farmers replaced the large
plantations.
 With few resources, the farmers depended on credit to
purchase the goods and services they needed.
 To repay their debts, farmers grew cotton as a cash crop.
 Eventually more cotton was
produced than could be sold,
and the price of cotton fell
drastically.
Today
 The cost of energy is a concern for consumers.
 One form of energy is fossil fuels.


Oil is a fossil fuel that is a nonrenewable resource.
 There is a limited supply available.
As other nations build more factories, drive more cars, and
buy more computers, the rising demand for oil causes an
increase in oil prices.
 Future demand by individuals, businesses, and nations
for fossil fuels will continue to cause increases in the
price of fossil fuels, unless the demand can be
satisfied by alternative energy sources.
Video- Supply and Demand
 Supply and Demand
Competition
 Competition— Competition occurs when more than
one business offers the same good or service.
 Competition increases production and efficiency
because it motivates a business to offer goods at better
prices or a better quality than their competitors.
 For this reason, when many businesses are competing
with each other for customers, the prices of goods or
services often go down.
 On the other hand, when there is no competition, a
business can charge any price it wants for a good or
service. Competition is very important to the economy.
Productivity
 Productivity— The measurement of efficiency by
comparing output produced by a business to the
resources, labor, and capital put in to producing goods.
 Businesses always have an incentive to improve their
productivity.

With increased productivity, a firm can use fewer resources
to create the same amount of goods.
 A firm will then be able to spend more on resources,
such as labor and materials.

In turn, the firm will be able to increase its output and/or
reduce its price. This will increase the supply of the good,
which will reduce the price consumers pay.
The Effects of Competition
 Technological innovations in the 20th century
changed the way of life for many people.
 Jobs that were previously complex or time consuming
became simpler because of new technology.
 People were able to do more things in a shorter period
of time both at work and in their homes.
 These innovations increased the average person's
productivity.

A person's increased productivity and ability to handle tasks
more easily created an increase in standard of living.
The Effects of Competition
 In a market economy, consumers dictate what is
produced and how much they are willing to pay for the
products.
 If they feel a good is over-priced or isn't useful, they will
not purchase it.
 Businesses have to respond to consumers' actions or
face going out of business.


In this way, businesses are encouraged to keep prices low and
continuously improve their products.
With more quality goods available, consumers will experience
a higher standard of living.
Other Important Terms
 Standard of Living— The level of material
comfort of a people or nation as measured by the
goods, services, and luxuries available to them.
 Free Enterprise System— An economic system
in which the people and businesses work
together to conduct economic activity with no
government involvement.
 When the United States government was being formed,
people were eager to set up this type of system because
they didn't want the government interfering with the
economy.
Video- The Way We Live-Working
World: The Economy and Work
 The Way We Live-Working World: The Economy and
Work