Supply and Demand

Goals:

• Describe supply and demand orally and with graphs.
• Discus how supply and demand affect prices of products and services.

Key Terms:

• consumer
• producers
• demand
• supply
• market price
  
   
• Participating in a Market Economy – In a market economy, buyers and sellers use the marketplace to make economic decisions. Buying decisions are made by the consumers – including individuals, businesses, and government. A consumer is a person who buys and uses goods and services. The individual buying decisions of consumers have a tremendous influence on the market economy. Consumers decide what to buy, where to buy, from whom to buy, and what price they are willing to pay.
  Producers pay close attention to the needs and activities of consumers. Producers are individuals and organizations that determine what products and services will be available for sale. Producers invest resources and take risks in order to make a profit. They determine what products and services will be available in the economy, what needs and wants they will try to satisfy, and the prices they want to receive.
  It may seem that the economy is a big, unorganized system in which everyone pursues his or her own self-interest. You may wonder how the system can work when each business makes its own decisions about what to produce, while each consumer makes a decision about what and where to buy. The system does work and works well based on the principles of supply and demand.
  Consumers Set Demand – When consumers make decisions about what they will purchase, they determine the demand for goods and services. Demand is the quantity of a good or service that consumers are willing and able to buy. A business can prosper or fail based on the demand for their products and services. For example, if a new restaurant opens in your town, but the service is slow, the quality of the food is poor, and the noise level is high, will consumers continue to eat there? It is not likely. Suppose a new restaurant opens with terrific food, as well as fast and friendly service. That restaurant will probably be packed with people waiting in line for dinner.
  Producers Establish Supply – Understanding demand tells a business what type and what quantity of products and services to supply. Supply refers to the quantity of a good or service that businesses are willing to and able to provide. If consumers are seeking a popular product and are willing to pay a high price for it, businesses will provide the product to meet consumer needs. On the other hand, if there is heavy competition for a product keeping the prices low or if consumers are tiring of an older product, businesses are less likely to want to offer the product for sale.
  A Graphic View – Demand and supply for a product or service can be illustrated by using graphs known as demand curves and supply curves. The demand curve for a product illustrates the relationship between the price of a product and the quantity demanded by consumers. As the price decreases, the number of consumers willing and able to purchase the product will increase.   

In the same way the supply curve for a product illustrates the relationship between the price of the product and the quantity businesses will supply. As the price increases, businesses will be willing to supply larger quantities of the product.

Determining Price – Why is the price of a hotel room in Phoenix, Arizona higher in the winter than summer? Why do the prices on many of the products sold by farmers remain quite low? Prices are affected by the relationship between supply and demand plus other factors.
Factors Influencing Demand – If many consumers want (or demand) a particular good or service, its price will tend to go up. More people vacation in Phoenix in the winter than in the summer so demand and prices for hotel rooms rise. When fewer people visit that area during the hot summer, the supply of hotel rooms is greater than the demand. Therefore, prices will decline.
When consumers see a number of products that they believe will satisfy a particular want or need, demand for and one of those products will not be as high. Consumers will be willing to switch from one product to another if the price of one is much higher than the others. When customers cannot find a good substitute for a product they want, demand for that product will be high. Even if the price increases, they will be willing to pay the higher cost because they are unwilling or inable to switch to another choice.
Factors Influencing Supply – The supply of a product can also affect the price. Because the supply of many of the crops and livestock raised on farms is large, prices remain low. If a drought cuts the quantity of corn grown by Midwest farmers one year, the price of corn will increase.

Competitors are businesses offering very similar products to the same consumers. As the number of competitors increases, so does supply. A business will not be able to easily raise its prices. It will have to be much more sensitive to the prices charges by it competitors.

When competition is limited, consumers cannot find good alternatives. If you live in a part of town where there is only one grocery store, the prices at that store will often be higher due to the lack of competition. The prices of products featuring new technology will often be high because the company offering the new product seldom has direct competition.
Sometimes a natural disaster or other unforeseen circumstance affects supply. If the supply of oil, gasoline, or water is disrupted, their prices will increase. The supply of other products that use those resources in production may also be affected and their prices can increase as well. Sometimes businesses will try to restrict supply of products in order to obtain a higher price. That will only work if customer demand is high and if there are no good substitutes for the product.
Determining Market Price – Supply, demand, and competition determine the market price for a product or service. The market price is the point where supply and demand are equal.

Consumers are willing to rent nearly 2,000 movies and businesses are willing to supply that same number of movies if the rental price is just below $6 per movie.
 

Assignments - 1-4 Assessment

Define Chapter 1-4 Key Terms

Complete Assesment 1-4