Download 3 Supply and Demand

Supply and Demand
Prices in a Free Market System
Supply and Demand
• Demand
• Demand is the quantity of a good that people
want to buy.
• In general, the higher the price of a good, the
less people will want to buy it.
• The opposite is also true.
• The lower the price of a good, the more
people will want to buy it.
• The Demand Curve on the next page shows
the relationship between price and the
quantity that is demanded:
Supply and Demand
Supply and Demand
• Supply
• Supply is the amount of a good that
producers are willing to make and sell in the
market.
• In general, the higher the price of a good, the
more producers will want to make.
• Producers of products usually do not want to
make goods that are selling at relatively low
costs.
• The Supply Curve on the next page shows
this relationship:
Supply and Demand
Supply and Demand
• Equilibrium Price
• In a free market system, prices are
determined by the interaction of supply and
demand.
• The price of a product will tend to adjust itself
to a level where the amount demanded and
the amount supplied is equal.
• At this point, the market price is said to be "at
equilibrium."
• In a free market economy, the equilibrium
price will constantly adjust itself to changes in
supply and demand.
Supply and Demand
• In theory, the phenomena of equilibrium
prices ensures that in a free marker 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.
Supply and Demand
• The following chart
shows where the
equilibrium price is:
Supply and Demand
• Supply and Prices
• The equilibrium price will change as the level
of supply changes.
• An increase in the total supply of a product is
shown by drawing a new supply curve to
the right of the old supply curve.
• By doing this, we can illustrate how when the
supply of a good increases, the market sets a
new equilibrium price which is lower than the
old one.
• Sellers of the product will tend to shift their
prices down to the new equilibrium, for
example:
Supply and Demand
• A decrease in supply would have the
opposite effect.
Supply and Demand
• Demand and Prices
• The equilibrium price will change as the level
of demand changes.
• An increase in the total demand for a product
is shown by drawing a new demand curve to
the right of the old demand curve. (on the
next page)
• By doing this, we can illustrate how when the
demand of a good increases, the market sets
a new equilibrium price which is higher than
the old one.
Supply and Demand
• A decrease in demand would have the
opposite effect.
• We would illustrate that with a new
demand curve to the left of the original
demand curve.