Demand and Supply

• • • • In a market economy prices are set by a kind of interaction.

The interaction is the effect that two forces- demand and supply- have on each other.

Consumers are the people who buy the goods and services.

Producers are the people who or businesses that provide the services.

• • • • • • In economics, the demand is the amount of a good or service that people are willing and able to buy at various prices during a given period of time.

Amount – Demand measures how much of a good or service consumers are willing to but over a range of possible prices.

Willing to buy – consumers must be willing to but a good or a service or there is no demand.

Able to buy – Consumers must have the ability to buy the good or service.

Price – The quantity that consumers are willing and able to buy is associated with a particular price, be it high or low.

Supply is the amount of a good or a service that producers are willing and able to sell at various prices during a given time period.

• • • • • • • • • The quantity of a particular item that is demanded or supplied at each price can be shown in a schedule.

The information on a schedule can then be drawn as a line on a graph.

The graph includes a demand curve and a supply curve.

Note that each point on the demand curve shows the amount demanded at a particular price.

Likewise, each point on the supply curve shows the quantity supplied at a particular price.

The demand and supply curves together show a market.

A market is a place where buyers and sellers of the same good or service come together.

To be efficient, markets must have many competing buyers and sellers.

The competition or struggle among sellers to attract buyers, keeps the products price at or near a certain level.

• • • • • • • • Markets are vital to the US economy.

Markets also help prevent the production of too many, or too few, goods and services.

Note the supply and demand curves meet at one point. It is called the equilibrium price.

A surplus is the amount supplied by the producers is greater than the amount demanded by the consumers.

A surplus tends to cause the prices to fall.

If the price were lower than the equilibrium price, there would be a shortage.

A shortage would cause the price to rise.

• • • • • • One factor is the number of consumers.

Another factor is a change in the consumer income.

This causes demand to go up.

If people earn less they do not buy as much.

The third factor that affects demand is the change in consumer preferences.

For example if scientists discover a certain organic health compound consumers would buy more of it.

• • • • Several factors affect supply.

The two key factors are the number of suppliers and the costs of production.

As the number of suppliers increases, the available quantity if a good or services increases.

As the cost of producing a good or service goes up, producers supply less.

• • • • • • • • • • • • A market is any setting where goods and services are exchanged for money.

It can even exist on the web.

In this type of economy, consumers and producers use prices to help make economic decisions.

Price also measures value.

All economic systems answer three basic questions.

What to produce?

How to produce?

For whom to produce?

In a market economy, prices help to answer these questions.

Price tells producers what to produce.

Why are no Large screen black and white t.v.`s produced?

Products are made for consumers who can buy and will buy them at a particular price.

• • • • • • • Every good has a price.

Consumers and producers use prices to value goods and services.

If a T –shirt cost $10 and a pair of jeans cost $25, then a pair of jeans is worth two and a half T – shirts.

Prices send signals to consumers and producers.

If consumers think a price is too high they will not buy it.

On the reverse, when consumers can not find a good or service at the low price they want to pay, they must recognize that no producer is willing to supply it to them at that price.

Consumers will have to adapt, or change, their expectations about what they have to pay to get the good or service, or they will have to go without it.

• • • • • In a command system the government officials answer the three basic economic questions.

Government officials also set prices on most goods and services.

Price is not something that consumers and producers work through the interaction of supply and demand.

Prices are set by the government based on the relative value of the goods and services.

Even on command economies however, price may be the answer to the third economic question: for whom are the goods and services are produced.