2. 2 SUPPLY AND DEMAND I: HOW MARKETS WORK

3. Copyright © 2004 South-Western A Market Economy Consumer: a person who buys and uses goods and services Producer: individual or organization that determine what products and services will be available for sale

4. Copyright © 2004 South-Western Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work.

5. Copyright © 2004 South-Western A market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people... as they interact with one another in markets. MARKETS AND COMPETITION

6. Copyright © 2004 South-Western MARKETS AND COMPETITION Buyers determine demand. Sellers determine supply

7. Copyright © 2004 South-Western DEMAND The quantity of a good or service that consumers are willing and able to buy

8. Copyright © 2004 South-Western SUPPLY The quantity of a good or service that businesses are willing and able to provide

9. Copyright © 2004 South-Western A GRAPHIC VIEW Supply and demand can be illustrated using graphs known as supply curves and demand curves. DEMAND CURVE Illustrates that relationship between the price of a product and the quantity demanded SUPPLY CURVE Illustrates the relationship between the price of a product and the quantity businesses will supply

10. Copyright © 2004 South-Western DEMAND Quantity demanded is the amount of a good that buyers are willing and able to purchase. Law of Demand The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

11. Copyright © 2004 South-Western Catherine’s Demand Schedule

12. Figure 1 Catherine’s Demand Schedule and Demand Curve Copyright © 2004 South-Western Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

13. Copyright © 2004 South-Western Factors Affecting Demand

14. Copyright © 2004 South-Western SUPPLY Quantity supplied is the amount of a good that sellers are willing and able to sell. Law of Supply The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

15. Copyright © 2004 South-Western Ben’s Supply Schedule Supplied

16. Copyright © 2004 South-Western Figure 5 Ben’s Supply Schedule and Supply Curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied. Supplied

17. Copyright © 2004 South-Western Factors Affecting Supply

18. Copyright © 2004 South-Western SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

19. Copyright © 2004 South-Western SUPPLY AND DEMAND TOGETHER Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

20. Copyright © 2004 South-Western At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

21. Figure 8 The Equilibrium of Supply and Demand Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

22. Figure 9 Markets Not in Equilibrium Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Supply Demand (a) Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $2.50 10 2.00 7

23. Copyright © 2004 South-Western Equilibrium Surplus When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

24. Figure 9 Markets Not in Equilibrium Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand (b) Excess Demand Quantity supplied Quantity demanded 1.50 10 $2.00 7 4 Shortage

25. Copyright © 2004 South-Western Equilibrium Shortage When price the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

26. Table 4 What Happens to Price and Quantity When Supply or Demand Shifts? Copyright©2004 South-Western

27. House Example

28. Copyright © 2004 South-Western Your Turn… 1.How does the price of a product affect supply and demand? 2.How is the market price for a product determined? 3.Answer #1-5 on page 26 of your text. Put these answers into a Word document. Then go to outlook.com and log on to your school email. Your email address is: firstname.lastname@stu.lyon.kyschools.us The password is the same as your computer login. Email me your responses. amy.argo@lyon.kyschools.us