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Supply, Demand, and Prices
Demand & Supply
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How are prices set in the
marketplace?
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Producers are searching for
profit
Consumers are looking to
best spend their limited
resources
Interactions with one
another lead to finding an
equilibrium price for their
goods

Defined: The price at which
the quantity demanded by
consumers and the quantity
supplied by producers is
equal
Demand & Supply
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If prices are too high:
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Consumers will not purchase a good
Producers will be left with extra supply
This is called a surplus
If prices are too low:
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Consumers will purchase as many of the good as possible
Producers will sell-out of their item
This is called a shortage
EXAMPLE: Holiday Toys
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Marketers sometimes
overestimate popularity, others
underestimate
Example: Tickle Me Elmo
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Introduced for Christmas in 1996
Price was set at $30
Sold slowly at first, and it seemed
that stores would have surplus
Slowly, the toy became very popular,
and a shortage developed
Because of this, the price went up to
$45
By spring, supply doubled; demand
decreased, price dropped to $25
Setting Prices
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Supply & Demand are constantly changing
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Recall: What are the six factors that affect supply?
Recall: What are the six factors that affect demand?
Because of this, the equilibrium price will continually
change as well
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When quantity demanded and quantity supplied are not in
balance, it is called a disequilibrium
Changes in Demand
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The six factors that cause a change in demand
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A demand curve slopes in which direction?
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From upper left to lower right
If there is a decrease in demand, the curve shifts…
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Income
Consumer taste
Consumer expectations
Market size
Substitutes
Compliments
To the left
If there is an increase in demand, the curve shifts…
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To the right
Changes in Supply
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The six factors that cause a change in supply
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A supply curve slopes in which direction?
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From lower left to upper right
If there is a decrease in supply, the curve shifts…
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Input costs
Productivity
Technology
Government action
Producer expectations
Number of producers
To the left
If there is an increase in demand, the curve shifts…

To the right