Supply and Demand

1. Supply and Demand Prices in a Free Market System

2. Supply and Demand • Demand • Demand is the quantity of a good that people want to buy.  • In general, the higher the price of a good, the less people will want to buy it.  • The opposite is also true.  • The lower the price of a good, the more people will want to buy it.  • The Demand Curve on the next page shows the relationship between price and the quantity that is demanded:

3. Supply and Demand

4. Supply and Demand • Supply • Supply is the amount of a good that producers are willing to make and sell in the market.  • In general, the higher the price of a good, the more producers will want to make.  • Producers of products usually do not want to make goods that are selling at relatively low costs.  • The Supply Curve on the next page shows this relationship:

5. Supply and Demand

6. Supply and Demand • Equilibrium Price • In a free market system, prices are determined by the interaction of supply and demand.  • The price of a product will tend to adjust itself to a level where the amount demanded and the amount supplied is equal.  • At this point, the market price is said to be "at equilibrium."  • In a free market economy, the equilibrium price will constantly adjust itself to changes in supply and demand. 

7. Supply and Demand • In theory, the phenomena of equilibrium prices ensures that in a free marker system: • There are no surpluses. • There are no shortages. • Firms are encouraged to make the goods people want most. • Goods are made available at the cheapest possible price.

8. Supply and Demand • The following chart shows where the equilibrium price is:

9. Supply and Demand • Supply and Prices • The equilibrium price will change as the level of supply changes.  • An increase in the total supply of a product is shown by drawing a new supply curve to the right of the old supply curve.  • By doing this,  we can illustrate how when the supply of a good increases, the market sets a new equilibrium price which is lower than the old one. 

10. Supply and Demand • Sellers of the product will tend to shift their prices down to the new equilibrium, for example: • A decrease in supply would have the opposite effect.  • We would  illustrate that with a new supply curve to the left of the original supply curve.

11. Supply and Demand • Demand and Prices • The equilibrium price will change as the level of demand changes.  • An increase in the total demand for a product is shown by drawing a new demand curve to the right of the old demand curve.  (on the next page) • By doing this, we can illustrate how when the demand of a good increases, the market sets a new equilibrium price which is higher than the old one.  • Sellers of the product will tend to shift their prices up to the new equilibrium, for example: (see next page)

12. Supply and Demand • A decrease in demand would have the opposite effect.  • We would illustrate that with a new demand curve to the left of the original demand curve.