Lesson 3 pg 452 Demand and Supply in a Market Economy Consumers – people who buy goods and services. They are the ones who “demand.” Producer – a person or business that provides goods and services for the consumer. They are the ones who “supply” Demand – Amount of goods and services consumers are willing to buy over a range of prices

More about Demand Amount – measures how much of a G/S people would buy over a range of prices Demand tends to lower as prices rise Demand tends to rise as prices lower Willing to buy – Consumers must be willing to buy the G/S or there is no demand

Able to buy – amount of money on hand affects ability to buy a good Able to buy – amount of money on hand affects ability to buy a good. People may want the good, but if they do not have the money to buy it, demand cannot be measured. Price – willingness and ability to buy is affected by the price, high or low.

Supply The amount of G/S producers are willing and able to sell over a range of prices

Law of Demand Amount of goods and services demanded will change in the opposite direction from changes in price. Consumers will buy more when price is low, and less when price is high.

Law of Supply The amount of a good or service producers supply to market will increase or decrease in the SAME direction with changes in price. They’ll supply more when the price is high, and less when the price is low.

Law of Supply

Markets and Competition The demand and supply curves, together on a graph, show a market. Buyers and sellers coming together and agreeing on a price

How prices are set Market – any place where buyers and sellers of the same G/S come together. Prices show the point of balance where buyers are willing and able to buy a good AND the producers are willing to make the sale for a profit. This profit may be great or small. The sale price may also be at a loss…in a producers effort to bail out of a failing market.

Equilibrium Price – also called Market Price Equilibrium Price – also called Market Price. The balance point on the curves where demand and supply meet. An imbalance in one direction may lead to a shortage (not enough) or, a surplus (too much). Prices will rise or fall, respectively.

Factors affecting Demand More consumers willing and able to buy increases demand. The opposite is true. Income status Consumer preference Perceived benefit or harm

Factors Affecting Supply Number of suppliers Cost of production Businesses always seek a better “how” to lower cost of production. WHY?

Answer Lower costs lead to greater profits. Lower costs also give producers an advantage over competition. HOW?

Lesson 3 Review 1. Explain the role of consumers and producers in a market economy. In a market economy, consumers are the people who buy goods and services and producers are businesses that provide them. Extra… Think of as many words you can use to substitute “provide”

Design Manufacture Mine Harvest Fish Transport Distribute Sell Repair

2. Explain the four parts of the definition of demand. The four parts of the definition of demand are amount—how much of a good or service consumers will buy; willingness to buy—if consumers are not willing to buy a good or service, there is no demand; ability to buy—if consumers do not have the money, they cannot buy the good or service; and price—this affects how much consumers buy.

3. How does competition among too few sellers affect price? Competition among too few sellers can lead to higher prices. Profit motive compels producers to charge whatever they can get, without pushing consumers away. Fewer competitors in a market also affects ….

Quality – knowing there are few alternatives for the consumer, producers in a monopoly or oligopoly market tend to lower quality to cut costs and increase profits. “Where else are you going to go?” mentality.

Variety – Producers focusing on a specific type of production boosts output and cuts cost, thus, increasing profits. “They can have any color they want, as long as it’s black” …Henry Ford

4. Analyzing When a store has a sale, it cuts the prices on the goods it sells. Is that more likely to happen when there is a surplus or when there is a shortage? Explain.

It is more likely with a surplus, because if there is not enough demand for the goods the store has at the current price, it has to cut the price in order to increase demand. Extra – What might a battery company do with an engineer’s idea of a true “forever battery”…or a light bulb company…with a forever light bulb.

Producers will squash the idea, to perpetuate the consumers demand for their current product. The life span of “consumables” is often engineered. A battery or light bulb is designed to fail over time, to perpetuate demand…

“Planned obsolescence”. It keeps consumers buying the product. It’s called “Planned obsolescence”. It keeps consumers buying the product.

5. Summarizing What are three functions of prices in a market economy? Prices help answer the three basic economic questions, measure the value of goods and services, and send signals to consumers (to buy or not to buy) and producers (to sell or not to sell). If prices are low enough, producers will idle production…laying-off workers, closing factories and retail outlets.

Gas shortages of the 1970’s were not caused by a true lack of oil in the ground…it was from the refusal of the OPEC nations to drill for oil and bring the supply to market. They agreed amongst themselves to CUT production. This increased prices. OPEC = Oil Producing and Exporting Countries, a Cartel. A group of producers acting in their joint interests.

6. INFORMATIVE/EXPLANATORY New products are often expensive, and then they become less expensive over time. Use the factors that affect supply and demand to explain why this happens. First explain what makes new products have higher prices. Then explain why the same products are sold at lower prices over time. Improved efficiency in production and more sellers in competition as factors increasing supply, which would reduce price; there is also likely to be a growing number of consumers interested in the product over time, increasing demand for it and thus leading to even greater supply from sellers.