Agribusiness Library
Lesson 060101 Supply and Demand
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Objectives
1. Define supply, identify factors that affect
supply, and explain the Law of Supply.
2. Define demand, identify factors that affect
demand, and explain the Law of Demand.
3. Analyze the supply and demand relationship,
define market equilibrium, define disequilibrium,
and analyze the factors that cause disequilibrium.
4. Examine how government actions can impact
supply and demand for products.
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Terms
 ceteris paribus
 complement good
 demand
 demand curve
 expectations of consumers
 expectations of producers
 income
 Law of Demand
 Law of Supply
 market equilibrium
 number of buyers
 number of sellers
 price ceilings
 price floors
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Terms (cont’d)
 prices of related goods
 quantity demanded
 quantity supplied
 resource prices
 shortage
 subsidy
 substitute good
 supply
 supply curve
 surplus
 tastes and preferences
 taxes
 technology
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What is supply?
What is the relationship between
price and quantity supplied?
What is the Law of Supply?
The Law of Supply states that as the market
price of a good or a service increases, the quantity
supplied in the market will also increase: ceteris
paribus. (Note ceteris paribus is a Latin term that
means “everything else held constant.”)
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What is supply?
What is the relationship between
price and quantity supplied?
What is the Law of Supply?
A. Supply is the relationship between market price
and the amount of goods and services produced in
the economy.
1. The supply curve is a graphical depiction of the
relationship between price and quantity supplied.
The supply curve slopes upward, so it is positively
sloped.
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What is supply?
What is the relationship between
price and quantity supplied?
What is the Law of Supply?
A. Supply (cont’d)
2. Changes in market price will only change quantity
supplied, which is a movement along the supply
curve.
3. All non-price, supply-related changes in the market
will shift the supply curve left or right.
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What is supply?
What is the relationship between
price and quantity supplied?
What is the Law of Supply?
B. A number of non-price changes shift the supply
curve.
1. The number of sellers in the market will
influence the supply curve. An increase in
the number of sellers in the market will shift
the supply curve right.
2. Technology will influence the supply curve.
Technologies that make production more efficient will
shift the supply curve to the right.
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What is supply?
What is the relationship between
price and quantity supplied?
What is the Law of Supply?
3. Resource prices will influence the supply curve. An
increase in the price of inputs will shift the supply
curve to the left.
4. Expectations of producers will influence the supply
curve. If producers expect demand for their goods and
services to increase, then the supply curve will shift right.
5. Prices of other goods the firm could produce will influence
the supply curve. If the prices of other goods the firm
could produce rise, then the supply curve will shift left.
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What is demand?
What is the relationship between
price and quantity demanded?
What is the Law of Demand?
The Law of Demand states that as the market
price of a good or a service increases, the quantity
demanded of that good or service decreases: ceteris
paribus.
A. Demand is the relationship between market
price and the amount of goods and services
purchased in the economy.
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What is demand?
What is the relationship between
price and quantity demanded?
What is the Law of Demand?
1. The demand curve is a graphical depiction of the
relationship between price and quantity demanded.
The demand curve slopes downward, so it is negatively
sloped.
2. Changes in market price will only change quantity
demanded, which is a movement along the demand
curve.
3. All non-price, demand-related changes in the market will
shift the demand curve left or right.
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What is demand?
What is the relationship between
price and quantity demanded?
What is the Law of Demand?
B. A number of non-price changes shift the demand
curve.
1. The number of buyers in the market will influence the
demand curve. An increase in the population in the market
will shift the demand curve right.
2. Tastes and preferences will influence the demand
curve. When consumers develop a stronger preference for
a good or a service, the demand curve will shift right.
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What is demand?
What is the relationship between
price and quantity demanded?
What is the Law of Demand?
3. Income will influence the demand curve. An increase in
consumers’ income will shift the demand curve to the
right.
4. Expectations of consumers will influence the demand
curve. If consumers expect the price of a particular good
or service to increase, the demand curve will shift right.
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What is demand?
What is the relationship between
price and quantity demanded?
What is the Law of Demand?
5. Prices of related goods consumers can buy will
influence the demand curve.
a. If the price of a complement good rises, the demand
curve will shift left. For example, if the price of buns
increases, the demand for hot dogs will shift left.
b. If the price of a substitute good rises, the demand
curve will shift right. For example, if the price of
hamburgers increases, the demand for
hot dogs will shift right.
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What is the relationship between
supply and demand?
What conditions are necessary for
the market to be in equilibrium?
What factors might cause the
market to be in disequilibrium?
Market equilibrium occurs when the market price
is set such that quantity supplied is exactly equal to
quantity demanded.
A. Markets “clear” when they are in equilibrium.
Therefore, quantity supplied is exactly equal to
quantity demanded, thereby “clearing” the
marketplace of all goods.
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What is the relationship between
supply and demand?
What conditions are necessary for
the market to be in equilibrium?
What factors might cause the
market to be in disequilibrium?
B. Markets are in disequilibrium when the price is such
that quantity supplied is more than or less than
quantity demanded.
1. Price ceilings occur when the government sets a
maximum price for a good or a service. If the price
ceiling is set below the market clearing price, a
shortage will exist.
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What is the relationship between
supply and demand?
What conditions are necessary for
the market to be in equilibrium?
What factors might cause the
market to be in disequilibrium?
2. Price floors occur when the government sets a minimum
price for a good or a service. If the price floor is set above
the market clearing price, a surplus will exist.
3. If a price ceiling is set above the market clearing price or a
price floor is set below the market clearing price, the
market will remain in equilibrium.
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What impact can government
actions have on the supply and
demand for goods and services?
Governments can use taxes and subsidies to
influence supply and demand.
A. Governments can provide additional funds to
consumers in the form of a subsidy (monetary
assistance) to purchase a specified good or service.
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What impact can government
actions have on the supply and
demand for goods and services?
1. Subsidies will encourage consumers to purchase more
of the subsidized good or service. This will shift the
demand curve to the right.
2. Governments may use subsidies to encourage the
adoption of efficient technologies that might be too
costly for consumers to purchase.
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What impact can government
actions have on the supply and
demand for goods and services?
B. Governments can tax consumers to discourage the
purchase of a specified good or service.
1. Taxes (extra fees/charges levied by the government)
will discourage consumers from purchasing certain
goods or services. This will shift the demand curve
to the left.
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What impact can government
actions have on the supply and
demand for goods and services?
B. Governments can tax consumers (cont’d)
2. Governments may use taxes to reduce the demand for
products that are harmful to society. For example, a tax
exists on tobacco products, which have been shown to
affect public health negatively. Such taxes are
frequently called “sin taxes.”
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What impact can government
actions have on the supply and
demand for goods and services?
C. Governments can provide additional funds to
producers in the form of a subsidy so they can
produce more of a specified good or service.
1. Subsidies encourage producers to supply more of the
subsidized good or service. This will shift the supply
curve to the right.
2. Governments may use subsidies to encourage the
production of goods and services that benefit society.
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What impact can government
actions have on the supply and
demand for goods and services?
D. Governments can tax producers to discourage the
supply of a specified good or service.
1. Taxes will discourage producers from supplying the
taxed good or service. This will shift the supply curve
to the left.
2. Governments may use taxes to
reduce the supply of a product that
is harmful to society.
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