#1 Law of Demand
The law of demand and its uses rely upon an understanding of consumer (buyer)
behavior. In other terms how do shoppers behave? This key economic theory is
all about consumer choice. For
businesses it is key to understand what
factors have affected demand in the
past, this allows them to develop
forecasts (guesses) for the future,
helping to set prices.
Demand for a particular product or
service represents how much people
are willing to purchase at various
prices. Thus, demand is a
relationship between price and
quantity, with all other factors
remaining constant.
Demand is represented graphically as a
downward sloping curve with price on
the vertical axis and quantity on the
horizontal axis (as illustrated.)
Generally the relationship between price and quantity is negative. This means
that the higher the price level the lower the quantity demanded will be and,
conversely, the lower the price the higher the quantity demanded will be.
It is important understand that a free market economy (similar to ours here in the
USA) is driven not by producers (businesses) but by consumers. Ultimately the
market value for any good or service is determined by its value to the consumer.
Consumers will not buy a product they feel is not worth the cost. When
consumers are unwilling to buy what is offered at the current price, the seller will
have to lower the price. Think clearance sale.
Those businesses who produce things that consumers are willing and able to buy
are rewarded, they make a profit. Those who produce things that consumers
don’t want or can’t buy are penalized, they lose money and may go out of
business over time.
Answer the following questions in complete sentences.
1)
2)
3)
4)
What is demand?
What happens to demand if the price of a product is high?
Who drives a free market economy?
What happens to businesses that produce goods that consumers don’t
want or can’t buy?
#2
5 Shifters of Demand
There are 5 different factors that can influence the demand of a product, leading
to a change in its price.
1. Number of Buyers: increase or decrease in people wanting to but things in
the market.
2. Tastes: what is in fashion at the time, fads, or
stores stop selling things because of the change
in season. Fad such a rubber band bracelets
were huge one day gone the next.
3. Income: A rise or fall in income that causes
consumers to buy either normal goods or inferior
goods. Normal goods are any name
brand good and inferior goods are any
off-brand goods.
4. Expectations of Buyers: what
consumers think will happen to goods
because of outside services. Do they
think it will go on sale in the near
future. (Example: Wait until Black
Friday to buy a new TV)
5. Price of Related Goods: Prices of
substitutes and compliments cause changes in demand. A substitute is a similar
good to the product that is being produced. It competes for more consumers with
the product. A compliment is something you buy along with the product. They
come hand-in-hand normally, like peanut butter and jelly.
Answer the following questions in complete sentences.
5) How does taste influence demand? Provide another example of a fad that
is no longer in demand.
6) What is the difference between normal and inferior goods? What are some
examples of normal and inferior goods you may use in your home?
#3 Law of Supply
The law of supply can be approached from two different ways. The first is that it
represents the sum total of production, how many items are produced or made.
The other context for supply describes the behavior of producers. Supply
represents the quantities producers (businesses) are willing to sell over a
range of prices for any given time period. At the individual level, you may be
willing to produce a given product as long as the market price is equal to or
greater than the cost of producing
that product.
For example; a lemonade stand.
A producer would have certain
supplies needed to create a glass
of lemonade. Paper cups, lemons,
sugar, water, ice, a pitcher ect.
Once the cost of supplies is
calculated the producer realizes
that it costs them 50 cents to make
each glass of lemonade. To make
a profit and stay in business the
producer must charge more than
50 cents per glass.
Market supply is represented by
an upward sloping curve with price on the vertical axis and quantity on the
horizontal axis (As seen in the figure)
An increase in price in most instances will result in producers wanting to increase
the quantity of a given product they will bring to the market, therefore the
relationship between the price and supply is positive.
With higher prices the producers of goods and services will receive greater
profits. Greater profits will result in the means to expand production increasing
the supply, meaning their business will grow. However, producers can raise
prices only if consumers are willing and able to pay more.
The market doesn’t care what it costs businesses to produce something. Lower
prices are the market’s signal to producers that they have made too much of
something or that it is something consumers do not want.
Answer the following questions in complete sentences.
7) What is supply?
8) Why would a producer only be willing to offer a supply of an item at a
certain price?
9) What happens when producers encounter an increase in price?
#4
6 Supply Shifter Factors
1. Number of Sellers: the amount
of businesses that provide a
product to the market. How much
competition is there?
2. Technology: new inventions
make production easier.
3. Resource Prices: includes
everything from labor to resources
to cost of shipping. If those prices
go up the producer usually has to
raise their price as well, shifting
supply.
4.Taxes and Subsidies: Taxes make
supply decrease and subsidies make
supply increase. Taxes decrease supply
because it costs the company more to
produce the product. Subsidies increase
supply because the government gives
money to the company in order to make cost
of production less.
5. Expectations of Producers: what sellers think will happen in the market.
6. Prices of Other Goods the Firm Could Produce: sometimes it is cheaper to
produce another product than it is to produce the one that you currently are
producing.
Answer the following questions in complete sentences.
10) How would competition influence supply?
11) How could a new invention impact supply? Give an example.
12) What industries do you think our government would subsidize? (Think
products that are needed for survival)
# 5 Equilibrium
When supply and demand are equal (i.e. when they intersect on the graph) the
economy is said to be at equilibrium. The amount of goods being supplied is
exactly the same as the amount of goods being demanded. Thus, everyone
(individuals, business, or countries) is satisfied with the current economic
condition. At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are demanding.
As you can see on the chart, equilibrium occurs at the intersection of the demand
and supply curve, At this point, the price of the goods will be P* and the quantity
will be Q*. These figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the
prices of goods and services are constantly changing in relation to fluctuations in
demand and supply.
Answer the following questions in complete sentences.
13) What is meant by equilibrium?
14) On the graph what does P* and Q* represent?
15) Why is equilibrium said to be only reachable in theory?
Bonus
What is effected Supply or Demand?
On your paper write the number and supply or demand
Market
Event
1
wheat
2
redwood lumber
3
Hula hoops
4
cement
5
gasoline
6
umbrellas
7
tofu
8
gasoline
9
Oreo cookies
10
oranges
A drought destroys
much of the crop.
Environmentalists
urge consumers to
boycott redwood
products.
A famous musician
confides to People
magazine that "he
gets a big kick out of
his hula hoop."
A 7.9 earthquake
hits San Francisco.
Two oil supertankers
collide.
Heavy rain is
forecast.
Scientist discover a
way to make it taste
just like steak.
A new car is
introduced that runs
on water.
The price of milk
increases.
There's an early
frost which destroys
much of the crop.
What will be
effected supply
or demand
Sources.
"Supply & Demand - Basic Concepts of Economics." Supply & Demand - Basic Concepts of Economics. .
Nassivera's Site, n.d. Web. 14 Sept. 2015.
<http://www.hfcsd.org/webpages/tnassivera/news.cfm?subpage=1060>.
"Economics Basics: Supply and Demand | Investopedia." Investopedia. N.p., 30 Nov. 2003. Web. 14 Sept.
2015. <http://www.investopedia.com/university/economics/economics3.asp>.