Consumer Studies 1202

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1 Consumer Studies 1202 Unit 2: Chapter 5 Oct 10 1:24 PM Supply and Demand Demand is about you, the consumer and your needs and wants. Business seeks to satisfy your needs with the supply of goods and services. The law of demand states that when the market demands a high quantity of good or service, the prices for that good or service will be high. When the market demands a low quantity, the prices will be low. 1

2 How Does Demand Work?? Consumers demand for a good or service depends on a number of factors 1. Price of Goods: consumers will only pay a certain price for a good or service 2.Consumer behavior: In general, consumers have a sense of the value of each good or service they want. They pay so much and no more. 3.Price of Substitute goods: These are goods that can easily be replaced by another. For example tea would be a substitute for coffee. If the prices of coffee rise too much consumers will replace it with the lower priced substitute good tea. How Does Demand Work?? 4. Price of Complementary Goods: these are two goods that are usually used with one another. For example, if you own a car then you need gas to drive that car. When the price of gas rises consumers buy more fuel efficient cars or drive less. When gas prices are lower consumers tend to buy bigger gas guzzling vehicles, like trucks and SUVs. 5. Consumer Income: generally, the more money consumers have to spend, the higher will be their demand for goods and services as they satisfy wants and needs. The more you make the more you spend. 2

3 How Does Demand Work?? 6.Taste and Preferences: What individual consumers tastes and preferences like or choose will affect demand. For example: increased trends for healthier lifestyles has led to consumers demanding healthier convince foods. Image influences some consumer choices as well. If you want to look like a skateboarder you may opt to buy loose, baggy jeans to create the image of a skateboarder. Advertising is a major factor in influencing consumer tastes and demand for a product. The major role of advertising is to increase consumer demand for consumer goods and services. Charting Demand Demand curve is a graph used by economists to illustrate the relationship between price and demand. Price or P is charted on the y axis and quantity or Q is charted on the x axis. The line drawn between the points is called the demand curve (though the line may not have a curved shape). See figure below. 3

4 Supply Supply is the producer s side of the market. It refers to the quantity of goods and services that producers and sellers are willing or able to sell consumers. There is a direct relationship between the price of a good or service and the quantity offered for sale. The law of supply says that as prices rise, the quantity supplied by producers tends to increase. In turn, as prices fall, the quantity supplied tends to decrease. Supply A producers decision to supply a good or service depends on several factors: 1. Production costs: is how much will it cost to produce the goods or services. These can include labour costs, overhead costs of production space, materials to produce the product and equipment. Whenever any of these costs in increase general costs will increase and determine how much a producer will supply. 2. Changes in Technology: When technology changes it will affect the cost of production. For example with the introduction of computers and other communication and information technologies like robotics manufacturing prices tend to fall. Robotics may have a high initial costs but labour costs will decrease. 4

5 Supply 3. Owner s Desire: Although businesses must make a profit to survive, some owners want to create business for specialized products or services. They may not make a huge profit but offer this supply because of their own desire sell in an environment they create or like. 4. Environments Conditions: can have a major impact on producer s ability to supply a good or a service. For example, when the East Coast fisheries collapsed fishers were unable to supply fish that were still in demand. Weather conditions may also affect supply. For example too much rain may ruin a crop and affect the supply of it. Charting Supply Charting Supply: To illustrate the relationship between price and supply, economists use a graph called a supply curve. Note, producers supply more goods as the price increases and fewer goods as the price decreases. Again price is P on the y axis and quantity is charted on the x axis. See figure below. 5

6 Equilibrium Equilibrium: is used to describe the point where the forces of supply and the forces of demand or balanced. Think of demand as a market force that tends to increase the price of a good or service. Supply is the force that tends to reduce the price. When the two forces are in balance, or equilibrium, prices tend to remain stable. Consumers can afford and are willing to buy a product at the price charge. Producers can afford and are willing to supply a product at the price consumers will pay. See figure below. 6