3.02interpret the theory of supply and demand. supply vs. demand supply- the amount producers are...

3.02 Interpret the theory of supply and

demand

Supply vs. Demand

Supply- the amount Producers are willing and able to produce and sell.- Producers prefer to supply when the price is high.- This is known as a Seller’s Market.

Example: New CD is released. Producers will produce because consumers are willing to pay full price.

Supply vs. Demand

Demand- the Customer’s willingness and ability to buy the products.

-Consumers prefer to buy when the price is low.- Known as a Buyer’s Market.

Example: Joe makes minimum wage and prefers to buy CD’s when they go on sale.

The law of supply

Price of a product increases, quantity of supply increases

Price of a product decreases, quantity of supply decreases

The law of demand

Price of a product increases, consumer demand decreases

Price of a product decreases, consumer demand increases

When does surplus occur?

When supply exceeds demand.

Can occur when prices are too high

Can Occur when consumers buy competitor’s product.

When does shortage occur?

-When demand exceeds supply - Customers purchase products

regardless of the price.- May result in customer purchasing

a substitute product.

When does equilibrium occur?

When supply = demand Producer and Consumer are

satisfied on the same price

Elasticity is…

Elastic demand changes as demand changes

- Example: Cheeseburger

Inelastic demand rarely changes as demand changes

- Example: Gasoline

What might affect elasticity?

Availability of substitutes (Coke vs. Pepsi)

Brand loyalty (Gatorade vs. Powerade)

Price relative to income Luxury vs. necessity (want vs. need) Urgency of purchase