1. Prices in a Free Market System
Supply and Demand
Prices in a Free Market System

2. WHAT IS Supply and Demand?
Page 210 of your textbook

3. KEY DEFINITIONS Supply Demand Equilibrium Surplus Shortage
The Products (goods) and services being produced
Demand
The wants and needs of the consumer
Equilibrium
When the supply of a product can meet (match) the demand at a certain price
Surplus
When there is more supply than demand
Shortage
When there is more demand than supply

4. Theory
In theory, the phenomena of equilibrium prices ensures that in a free market system:
There are no surpluses.
There are no shortages.
Firms are encouraged to make the goods people want most.
Goods are made available at the cheapest possible price.

5. Pg. 210-211 & Pepsi vs. Coca-cola
How does it work?
Pg & Pepsi vs. Coca-cola

6. STEP 1: EQUILIBRIUM PRICE SUPPLY DEMAND $1.65 $1.69
At first, there is so little difference in price that there is equilibrium between supply, demand and price for both products.
SUPPLY
DEMAND
PRICE

7. STEP 2: DEMAND FOR ONE PRODUCT INCREASES
SUPPLY
$1.40
SUPPLY
$1.69
DEMAND
To compete more effectively with Pepsi, Coca-Cola may decide to lower their price to increase demand for their product.

8. STEP 3: THE EQUILIBRIUM HAS BEEN DISTURBED!
Since people are buying Coke, supply of Pepsi has gone up. To compete with Coca-Cola, Pepsi reduces the price of its cola.
Now, Coca-Cola are faced with a drop in demand for its cola, as it’s now more expensive. The supply increases.
SUPPLY
However, the increase in demand for Pepsi creates a drop in supply.
DEMAND
SUPPLY
DEMAND
$1.29
$1.40

9. STEP 4: PEPSI BECOMES MORE EXPENSIVE!
Reduced demand for, and increased supplies of, Coca-Cola, has caused the price to fall to $ However, increased demand for, and reduced supplies of, Pepsi, has caused the price to rise to $1.35.
Remember! This is a simplified version of reality: a model. It does not take into account other variables such as personal preference.
$1.35
$1.35
It may take several cycles in fluctuation in supply and demand for the prices to come closer to each other, but this is achieved eventually. Now, there is so little difference in price between the products that competition no longer affects supply and demand significantly. Equilibrium has been restored between supply, demand and price.
SUPPLY
DEMAND
PRICE

10. In summary: When Demand Goes Up
When demand for a product goes up, it means more consumers are buying the product
As consumers buy, the availability of the product drops
Which in turn drives up the price
Ex. Tickle Me Elmo, or Wii fit
Demand = Supply = Price
(Consumers) (Producers)

11. When Price Increases
When the price of a product goes up, fewer customers can afford to pay it, which drives the demand down, leaving an increase availability of the product.
Ex. Cars and Housing
Price = Demand = Supply
(Consumers) (Producers)

12. When Supply Goes Up
When supply of a product goes up, so does the availability.
When there is more available, the price of the product goes down (producers are encouraging consumers to buy more)
With the lower price, this encourages consumers to buy more, which in turn increases demand
Ex. Walmart
Supply = Price = Demand
(Producers) (Consumers)

13. Real life examples (of people losing their minds)

14. Class activity Listen to the following situations.
What would happen to the market (supply, demand) in each case?

15. Milk, eggs and Pickles
Split class into 3 groups and show what would happen in each case.