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Understanding Supply and Demand: Key Concepts and Market Dynamics

This guide explores the fundamental concepts of supply and demand in economics. Learn how consumer willingness and ability to purchase goods at various prices influences demand. Discover the Law of Demand, which states that as prices fall, demand increases, and vice versa. On the supply side, understand how producers determine how much to supply based on profit motives and market conditions. Key factors affecting both demand and supply include consumer income, preferences, and changes in competition or production costs. Grasping these principles is essential for navigating market forces.

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Understanding Supply and Demand: Key Concepts and Market Dynamics

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Presentation Transcript

  1. Market forces Supply and Demand

  2. Demand • When a person is willing to buy something at a given price. Must be willing and able to buy it. • How much would you pay for a slice of pizza? • What happens to your demand if the price is low (say 50 cents)? • What if the price is $10 per slice?

  3. Law of Demand • When price goes down, demand goes up • When price goes up, demand goes down • Prices affect demand, demand affects prices, but we also have to consider the supply side (the sellers/producers of a good/service)

  4. What else affects demand? (besides price changes) • Change in the weather • Change in population of an area • Change in a person’s income • Change in consumers’ tastes • Change in price of a substitute good • Change in expectations of future price or availability

  5. Supply For supply, you must think like a producer or a seller, not like a consumer! How much a producer of a good/service is willing to produce/sell at a given price How do they decide how much to charge for their good/service?

  6. Supply-side thinking Think like a producer (seller), not like a consumer(buyer)

  7. Why do producers produce goods and services? Profit motive!

  8. How much to produce? How much to charge? Not too much, not too little Too much = lost profit. Not enough = lost profit.

  9. What will change the quantity supplied?or Why will producers start making more or less stuff to sell? • Because they think they can make more money. This can be called their self-interest. • Does it ever make sense to make less of a good to make more money? • Yes… so you’re not over-producing. Also, you can shift production to something more profitable

  10. Price effects Price they can get - Costs(costs of production, input costs) Profit $$$ • Producers can make more money if the market price goes up. • More profit means producers make more to sell, and new producers enter the market to get some of the profits. Supply

  11. Law of Supply • When price/profit goes up, supply goes up. Why? • When price/profit goes down, supply goes down. Why?

  12. What else affects supply?(besides price changes) • More producers enter the market (why?) • Change in input costs (caused by what?) • Change in expectations of future profit • Discovery of a new source of inputs • Natural disaster, war disrupts inputs

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