2.02 Supply and Demand Understand Economics and Economic Systems Interpret supply and demand graphs

Marketplace In a free market, consumers determine the demand of a product. In a free market, consumers determine the demand of a product. Entrepreneurs see the demand and make more of the product. Entrepreneurs see the demand and make more of the product. More supply causes the price to decrease as the demand is fulfilled. 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). People and businesses enter the marketplace in hopes of making a profit (money). This “ profit motive ” encourages people to enter the marketplace. 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. This hope of making a profit is the reward for people who take risks by entering the marketplace.

Competition is sparked Sellers compete to make a profit Sellers compete to make a profit If a person sees that they can meet a need or a want, they enter the marketplace If a person sees that they can meet a need or a want, they enter the marketplace They compete with other businesses already meeting the need or want. They compete with other businesses already meeting the need or want.OR They make a new product and competition follows when others enter the marketplace. They make a new product and competition follows when others enter the marketplace.

Prices tell businesses what to produce The prices of goods and services dictate what products are developed, made, improved or modified. 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 high, demand falls and businesses produce fewer goods. When the price is low, demand rises and businesses produce more goods to meet the demand. When the price is low, demand rises and businesses produce more goods to meet the demand.

Supply vs. Demand Supply- the amount Producers are willing and able to produce and sell 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 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. 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. Supply is produced by the businesses in hopes of making money.

Supply Dollars Quantity $10.00 $20.00 $30.00 $

The law of supply Price of a product increases, quantity of supply increases Price of a product increases, quantity of supply increases Price of a product decreases, quantity of supply decreases Price of a product decreases, quantity of supply decreases

Demand Defined 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 increases, consumer demand decreases Price of a product decreases, consumer demand increases Price of a product decreases, consumer demand increases

Demand Dollars Quantity $10.00 $20.00 $30.00 $

Supply and Demand Graphs People draw supply and demand graphs so that they can easily see the relationship between the supply and the demand. 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. 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 shows changes in a product ’ s demand or supply. The graph can help predict the performance of the product over time. The graph can help predict the performance of the product over time.

When Supply and Demand Meet The point at which the supply and demand curve meet is known as the equilibrium price and quantity. 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 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. 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) Equilibrium/ Point Supply Curve Demand Curve Equilibrium Price Equilibrium Quantity

When does equilibrium occur? Supply = Demand Supply = Demand Producer and Consumer are satisfied on the same price Producer and Consumer are satisfied on the same price

When does surplus occur? Supply exceeds demand Supply exceeds demand Prices are too high Prices are too high Consumers buy competitor ’ s product Consumers buy competitor ’ s product

When does shortage occur? Demand exceeds supply (scarcity) Demand exceeds supply (scarcity) Customers purchase products regardless of the price Customers purchase products regardless of the price

Elasticity is… Elastic demand changes as demand changes Elastic demand changes as demand changes - Example: Cheeseburger Inelastic demand rarely changes as demand changes Inelastic demand rarely changes as demand changes - Example: Gasoline

Elastic Demand Dollars Quantity $10.00 $20.00 $30.00 $

Inelastic Demand Dollars Quantity $10.00 $20.00 $30.00 $

What might affect elasticity? Availability of substitutes Availability of substitutes Brand loyalty Brand loyalty Price relative to income Price relative to income Luxury vs. necessity (want vs. need) Luxury vs. necessity (want vs. need) Urgency of purchase Urgency of purchase