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Supply and Demand

Explore the different economic systems and learn how they impact the production, distribution, and consumption of goods and services. Discover the determinants of demand and supply, and understand the concept of market equilibrium, surplus, and shortage.

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Supply and Demand

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  1. Supply and Demand Microeconomics What is Marketing? Principles of Marketing

  2. Economic Systems Economic systems determine: What goods and services should be produced to meet consumer needs? How should they be produced, and who should produce them? (3) Who should receive goods and services?

  3. Planned Systems In a planned system, such as communism or socialism, the government controls the production and distribution of goods and services. In a true communist economy, there is no private property—everyone owns the factors of production. This type of planned economy is called a command economy. In a socialist economy, there is some private property and some private control of industry.

  4. Free Market System In a free market system, also known as capitalism, business is conducted with only limited government involvement. Competition determines: • what goods and services are produced • how they are produced • for whom Even in free markets, governments will maintain: • the rule of law • create public goods and services such as roads and education • step in when the market gets things wrong (e.g., setting minimum wage, establishing environmental standards)

  5. Mixed Economy More countries’ economies are evolving into a mixed-economy which has characteristics of more than one system.

  6. Demand The law of demand states that a higher price typically leads to a lower quantity demanded. A demand curve shows the relationship between quantity demanded and price in a given market on a graph (right).

  7. Shifts in Demand

  8. Supply The law of supply says that a higher price typically leads to a higher quantity supplied. A supply curve (right) shows the relationship between quantity supplied and price on a graph.

  9. Shifts in Supply

  10. Eqilibrium The equilibrium price and equilibrium quantity occur where the supply and demand curves cross since the quantity demanded is equal to the quantity supplied.

  11. Surplus and Shortage When the price is below the equilibrium level, excess demand or a shortage will exist. If the price is above the equilibrium level, excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level.

  12. Practice Question If more people stop eating dairy products, how will this impact the price of ice cream?

  13. Quick Review • What are the major economic systems? How do they differ? • What are the determinants of demand? • What the determinants of supply? • Can you define and graphically illustrate market equilibrium, surplus, and shortage?

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