Law of Supply and Demand The Economy economy Consumers, Producers, and the Market consumer producer market economy Free enterprise or Capitalism}

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1 Law of Supply and Demand The Economy You ve probably heard people say things like, The economy is down, or, Such-and-such would be good for the economy. Maybe you ve figured out that the economy has something to do with money. But what is this big, scary economy everyone s always worried about? And how can you avoid it? That was a trick question. You can t avoid the economy! An economy is the way goods and services are produced and consumed. Everyone is involved in the economy both by producing goods or services and by consuming them. Consumers, Producers, and the Market Have you ever bought anything or paid someone to do something for you? Then you are a consumer someone who acquires goods and services for his or her own personal use. Have you ever worked babysitting, or making fast-food tacos? Then you are a producer, too someone who makes goods or offers services for others. In a market economy {Free enterprise or Capitalism} producers are free to decide what to produce, and consumers are free to buy whatever they need and want. This selling and buying takes place in the market, which is not a physical place, but instead refers to the entire activity of buying and selling that takes place out in the world. So, why would anyone decide to produce and sell something? You guessed it money! Profit is the financial gain received by selling something for more than it cost to make it. Producers are motivated by the profits they expect to gain from the goods or services they offer. Their incentive to produce the thing that motivates them is the idea that consumers will want or need what they are offering. Thus, someone who thinks people want phones that respond to voice commands has an incentive to produce such phones because they expect they will profit from selling them to lots of consumers. But what about when two or more producers are offering the same goods or services? This results in competition producers battling over who can make the most profit. Competition is a big motivator. Here s what can happen: Better Stuff. Competition leads to innovation, which is the process of developing newer, better things. Think of iphones, Android phones, and Windows phones: The producers constantly come out with new versions that have newer, better capabilities. Why? Because each producer wants you to spend your money on its phone instead of the other guys phones. It s All About Supply and Demand While we can t say that our economy runs itself, we can identify a basic principle (a kind of motor) in economics that keeps the system running. This principle is the law of supply and demand. It works by creating interaction between those who wish to earn money by selling goods or services and those who wish to buy those goods and services. When a market economy is doing well, there is lots of buying and selling. During a bad economy, buying and selling slows down. The cycle of ups and downs depends mainly on two things: supply, the amount of something that is available, and demand, the number of consumers who want it. Supply and demand are called market forces because they act to make the market function well or poorly. To keep everyone producing, making profits, and buying things, supply and demand must be balanced. Here s what can happen if there is high demand but low supply: Imagine there is a big freeze in Florida and orange trees are damaged. Fewer oranges are available. If there is still a big demand for oranges, the price will go up. Fewer oranges also means there aren t as many oranges to process. Some people who pick oranges and get them ready to sell might lose their jobs. On the other hand, too much supply with low demand can also hurt. Imagine a coal producer is very busy over the summer and mines tons and tons of coal. Winter comes, but it doesn t get very cold. People don t use their furnaces as much as usual, so they don t need as much coal. All of that coal sits around unused and they certainly don t need to mine any more coal. The price of coal will drop, and some people involved in producing coal could lose their jobs because there is already too much.

2 The Law of Supply and Demand: The Forces That Balance the Market The price of goods and services is determined by the give and take between buyers{demand} and sellers{supply}. Buyers usually wish to get the best goods at the lowest price, and sellers usually wish to sell the most goods they can at the highest price. This interaction is described by the law of supply & demand. The law of supply and demand theory states the following: Consumers will increase their quantity demand for a product as the price decreases and will decrease quantity demand as the price increases. Producers will increase their quantity supply as the price increases and will decrease quantity demand as the price decreases. Stated another way, as the price for a product increases, the quantity demand for the product will decrease. And as the quantity demand for a product increases, producers will increase its price. Directions: Read each scenario. Match each label with the example that illustrates it. 6 Types of Demand: Elastic and Inelastic - Producers try to supply goods and services to meet the demands made by consumers. If producers lower or raise the price of a good and consumers respond by increasing or decreasing their quantity demand (amount of goods or services that consumers are willing to buy at a particular price) for that good, then the demand is called elastic.

3 On the First graph on the previous page illustrates elastic demand. The graph shows that as the price of doughnuts goes down from a price of 75 cents each to 25 cents each, consumers quantity demand more doughnuts. This is called an elastic demand because quantity demand changes as the price of the product changes. The more substitutes there are for a product, the more elastic the demand for that product will be. As the price of that doughnut went up, consumers probably began satisfying their sweet tooth with substitutes such as cookies. If any product is too high-priced, consumers will choose substitutes instead. The other type of demand is called inelastic. Inelastic demand means that regardless of whether the price of a good is raised or lowered, consumers quantity demand for that good will not increase or decrease. For example, the quantity demand for the medicine insulin, which is used by people who have the disease diabetes, is inelastic. Regardless of price, diabetics must have insulin, for which there is no available substitute. Lowering the price for insulin will not affect the demand. Insulin must be kept refrigerated and can only be stored safely for about 30 days. Consequently, diabetics will not order more of the drug because they cannot store insulin for more than a few weeks. In the same way, a rise in the price will not reduce sales because insulin is a necessity to maintain the life of some diabetics. There is no good substitute for insulin. *One key to determining whether a demand is elastic or inelastic is the availability of a substitute. In this Second graph example, a change in the price of the good had no effect on the demand for the good. That is what is meant by inelastic demand. Not all goods have as many substitutes as doughnuts or as few as insulin. But if you understand the basic principle that many substitutes for a good make the quantity demand for that good elastic, and a lack of substitutes for a good makes the quantity demand for that good inelastic, you will have mastered this lesson.

4 Directions: Answer all questions completely. 8) What is Quantity Demand? 9) What is Elastic Demand? 10) What is Inelastic Demand? -Using the First Graph- 11) At 25 Cents, how much demand is there for doughnuts? 12) At what price, dose the producer and consumer come to equilibrium? -Using the Second Graph- 13) How much insulin was used during a month s time? 14) Why didn t the price changes affect the insulin Demand? Directions: Read each Scenario, then decide if the price will go up or go down and explain why. 15) 16) 17) 18) 19) 20)

5 Directions: Read the information, then using the reading and charts, answer all questions completely. 21) 22) 23)