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3.02 Interpret the theory
of supply and demand
Supply vs. Demand
Supply- the amount Producers are
willing and able to produce and sell
- Seller’s Market
Demand- the Customer’s willingness
and ability to buy the products
- Buyer’s Market
The law of supply
Price of a product increases, quantity
of supply increases
 Price of a product decreases, quantity
of supply decreases
The law of demand
Price of a product increases,
consumer demand decreases
 Price of a product decreases,
consumer demand increases
When does surplus occur?
Supply exceeds demand
 Prices are too high
 Consumers buy competitor’s product
When does shortage occur?
Demand exceeds supply (scarcity)
 Customers purchase products
regardless of the price
When does equilibrium occur?
Supply = Demand
 Producer and Consumer are satisfied
on the same price
Elasticity is…
Elastic demand changes as demand
- Example: Cheeseburger
Inelastic demand rarely changes as
demand changes
- Example: Gasoline
What might affect elasticity?
Availability of substitutes
Brand loyalty
Price relative to income
Luxury vs. necessity (want vs. need)
Urgency of purchase