The Marriage of Supply and Demand

CivicsMr. Gibbs

Spring 2009

The Forces of Supply and Demand work together in markets to establish prices. In our economy, prices form the basis for economic decisions

SURPLUS

• If the quantity SUPPLIED is greater than the quantity DEMANDED… then there will be “units” left over.

• These “units” that are left unsold are referred to as a SURPLUS

SURPLUS

A SURPLUS signals that the price is too high.

It tells us that consumers are either unwilling, don’t have the desire, or are unable to purchase these goods and services at the current price.

Sellers will have to lower prices to increase demand (LAW of DEMAND)

SHORTAGE

If the quantity DEMANDED is higher than the amount SUPPLIED – you don’t have any more goods and services to sell

When you run out of things to sell, and there are still people desiring to, willing to and able to purchase your goods and services…then you have a SHORTAGE

SHORTAGE

A shortage signals that the price is too LOW.

Producers are unwilling to place goods and services into the product market at the current price

In order to increase the supply, the price will have to rise (LAW of SUPPLY)

EQUILIBRIUM PRICE

Over time:– the Surplus forces the price DOWN (law of Demand)– The Shortage forces the price UP (Law of Supply)

Until you find a balance….

• This balance – when the supply is equal to the demand – is called the “equilibrium price”

EQUILIBRIUM PRICE

• Once the Equilibrium Proce is found…it tends to stay there until there is a significant change in Supply/Demand (our handouts!!!!)

• Once one of the changes happens – you will have a surplus/shortage… and prices will have to fluctuate until they find the NEW “equilibrium price”

PRICE CONTROLS

• From time to time, the government will set the price of a product because it might think that the forces of supply and demand are unfair…

• Socialism?

•Might favor the suppliers or the demanders….

Ceiling and FloorPrice Ceiling• helps the “demanders/consumers” – it is the

maximum price that something can be charged for a good or service– Example: a rent controlled building….

Price FloorPrevent prices from dropping too low (helps

producer)Minimum price that can be charged for a good/service