EE - Supply and Demand Lesson

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Supply and Demand

Have you ever heard of the Law of Supply and Demand? Do you know what that means? How does that affect entrepreneurs? Look at this infographic for an overview of this economic law. This is the way that markets and entrepreneurs determine prices.

The concept of supply and demand is often called the heart and soul of economics. It is the foundation for much of what is studied in the field, and understanding how supply and demand affect the economy can help us to recognize economics everywhere in our daily lives. The supply and demand infographic highlights basic concepts such as the laws of supply and demand, changes in demand and supply versus changes in the quantity demanded and the quantity supplied, the determinants of demand and supply, and market equilibrium. The Law of Supply Supply and demand is how markets determine prices. The law of supply states that there is a direct, or positive, relationship between the price of a good or service and the quantity supplied of that good or service. Price is represented by the letter P and quantity supplied is represented by the letters Qs. In the image it shows that when P goes up then Qs goes up. Conversely, when P goes down then Qs goes down. The reason for this is that suppliers have an incentive to provide goods when the price increases because they can make more money and they have an incentive to supply fewer goods when the price goes down because they will make less money. The example is of a chocolate bar supply curve. In the image of the supply curve it shows that the quantity supplied at $2.00 is 500, but if the price drops to $1.60 then the quantity supplied will drop to 400. The determinants of supply that cause a change in quantity supplied are: • Input prices • Technology • Number of sellers • Producer expectations The supply curve will shift when factors of production change. The example given in the infographic is that if the price of cocoa and sugar increases then the supply will decrease and the curve will shift to the left, from $1. 00 to $2.00 (meaning that at the same price the quantity supplied will decrease, shifting the curve). The Law of Demand On the right side of the infographic is the explanation of the law of demand. There is an inverse or negative relationship between the price of a good or service and the quantity demanded of that good or service. In the image it shows that when P goes up the quantity demanded will go down and when price goes down the quantity demanded will go up. The example using the chocolate bar demand curve shows that if price decreases from $2.00 to $1.60 then the quantity demanded increases from 100 to 200 bars. The determinants of what influences demand are: • Income • Prices of related goods • Number of buyers • Consumer expectations The demand curve can shift if one of these items changes. For example, if the price of complementary goods decrease, such as a decrease in prices for graham crackers and marshmallows, then the demand will increase and shift to the right. In the image of the demand curve it shows that at the same price the quantity demanded will increase because the complementary goods decreased in price. Market Equilibrium When a market is in equilibrium, the quantity demanded equals the quantity supplied at the price that clears the market. This is the equilibrium price. The image of the supply and demand graph showing that when the quantity of chocolate bars demanded equal the quantity of chocolate bars supplied then the intersection is the equilibrium price. At this price there will not be a surplus or shortage of product supplied because the demand equals the supply. 

 

Please watch the following video about supply and demand.

 

Supply and Demand Challenge

Supply and Demand Matching Activity

Complete the Supply and Demand Matching Activity below:

 

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