1. The Demand and Supply Model
The basic structure of the free market system

2. Law of Demand
All else being constant, as the price of an item falls, the quantity demanded rises.
Similarly, as the price of an item increases, the quantity demanded decreases.
There is an inverse relationship between price and quantity demanded.

3. The Demand Curve

4. Law of Supply
As price rises the quantity supplied rises; as price falls the quantity supplied decreases.
Producers will produce and offer for sale more of their product at a high price than at a low price.
Profit = Price – cost
Businesses are driven to maximize profits.

5. The Supply Curve

6. Supply & Demand

7. Non-Price Determinants of Demand: Factors other than price that change demand for a product
Change in buyers tastes
Change in number of buyers
Change in income
Change in price of related goods (substitutes and complements)
Change in expectations

8. Change in demand

9. Non-Price Determinants of Supply: Factors other than price that change the supply of a product
Change in resource prices
Change in technology
Change in taxes and subsidies
Change in price of other goods
Change in expectations
Change in number of suppliers

10. Change in Supply

11. First ask is this a supply or demand situation?
The key to analyzing changes in markets. Ask: what is causing the change?
First ask is this a supply or demand situation?
If the change is the result of a change in price, and nothing else, then it is simply a movement along a stable demand or supply curve.
If the change is the result of a change in a non-price factor then the entire curve must shift left (decrease) or right (increase).

12. Analysis Tips To analyze demand problems think like a consumer.
For supply problems think like a producer.
Recall that producers want to maximize profits.
Profits = Price - cost
Consumers want lower prices.