Supply and Demand Chapter 1, 1.3 (part 2)

THE LAW OF DEMAND The law of demand says : as the price of a good or service rises, its quantity demanded falls. Note: The reverse is also true! In other words, as the price of a good or service falls, its quantity demanded increases. Price and quantity have an inverse relationship under the law of demand.

DEMAND CURVE The demand curve has a negative slope. This means it goes in a downward direction.

LAW OF SUPPLY The law of supply says: as the price of a good rises, its quantity supplied will rise. The same thing happens in reverse, too! (i.e. when prices fall, quantity supplied falls too) Price and quantity have a direct relationship under the law of supply.

QUESTION: Why would a business produce more goods or services when prices rise?

More money of course!

SUPPLY CURVE The supply curve has a positive slope. This means it moves in an upward direction.

MARKET EQUILIBRIUM This is where the quantity of goods/services supplied to the market equals the quantity of goods/services demanded. In other words, I’m willing to buy exactly the same amount as you are willing to sell.

MARKET EQUILIBRIUM In this scenario, the market clearing price is $3, which happens at 30 units.

SHORTAGE A shortage happens when: The quantity demanded is greater than the quantity supplied. In other words, there are too many people and not enough goods/services to satisfy everyone. This indicates that the market price is too low. Video clip: Friends episode Monica has candy shortage

SHORTAGE TABLE 4 Video Market Shortage PriceQuantity Demanded Quantity Supplied $51050 $42040 $330 $24020 $15010 Q P D S shortage Since demand for videos at $2 is greater than the amount of videos producers are willing to supply at that price, there is a shortage. (40 videos are demanded at $2, but only 20 videos are supplied.)

SURPLUS A surplus happens when: The quantity supplied is greater than the quantity demanded. In other words, there are more goods available than consumers will buy. This indicates that the market price is too high.

SURPLUS TABLE 4 Video Market Surplus PriceQuantity Demanded Quantity Supplied $51050 $42040 $330 $24020 $15010 Q P D S surplus Since demand for videos at $4 is less than the amount of videos producers are willing to supply at that price, there is a surplus. (20 videos are demanded at $4, but 40 videos are supplied.)