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
