Chapter 5SectionMain Menu Activating Strategy, 9.10.

Chapter 5 Section Main Menu

Law of Supply Law of Demand

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Activating Strategy, 9.10


Essential Question

What is the law of supply and demand?


The law of demand states that consumers buy more of a good when its price decreases and less

when its price increases.

What Is the Law of Demand?

• The law of demand is the result of two separate behavior patterns that overlap, the substitution effect and the income effect.

• These two effects describe different ways that a consumer can change his or her spending patterns for other goods.


Market Demand Curve

3.00

2.50

2.00

1.50

1.00

.50

0

0 50 100 150 200 250 300 350Slices of pizza per day

Pri

ce p

er s

lic

e (i

n d

oll

ars)

Demand

The Demand Curve

• A demand curve is a graphical representation of a demand schedule.

• When reading a demand curve, assume all outside factors, such as income, are held constant.


The Substitution Effect and Income Effect

The Substitution Effect

• The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

The Income Effect

• The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income.


Price

As price

increases…

Supply

Quantity supplied increases

Price

As price falls…

Supply

Quantity supplied

falls

The Law of Supply

• According to the law of supply, suppliers will offer more of a good at a higher price.


How Does the Law of Supply Work?

• Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price.

• The promise of increased revenues when prices are high encourages firms to produce more.

• Rising prices draw new firms into a market and add to the quantity supplied of a good.


$.50 1,000

Price per slice of pizza Slices supplied per day

Market Supply Schedule

$1.00 1,500

$1.50 2,000

$2.00 2,500

$2.50 3,000

$3.00 3,500

Supply Schedules

• A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.


Market Supply Curve

Pri

ce

(in

do

lla

rs)

Output (slices per day)

3.00

2.50

2.00

1.50

1.00

.50

0

0 500 1000 1500 2000 2500 3000 3500

Supply

Supply Curves

• A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.


Spiral Back Review, 9.14

1

23

4

A.

B.C.

D.


Outside Arrows (Clockwise) – Money

1 - Revenue

2 - Wages

3 – Income

4 - Expenditure

Inside Arrows (Counter clockwise) – Money

A. – Goods and Services

B. – Products

C. – Productive resources

D. - Resources


a. Define the Law of Supply and the Law of Demand. b. Describe the role of buyers and sellers in determining market clearing price. c. Illustrate on a graph how supply and demand determine equilibrium price and quantity. d. Explain how prices serve as incentives in a market economy.


The buyer’s demand curve in a market is determined by adding together all the quantities consumers are willing and able to purchase at each price in the market.

Demand Curve


The seller’s supply curve in a market is determined by adding together all the quantities producers are willing and able to sell at each price in the market.

Supply Curve


The market clearing or equilibrium price is found at the intersection of the market demand and supply curves. This is the point at which the quantity demanded by consumers is equal to the quantity supplied by producers.

Equilibrium Point


On the graph below, the equilibrium price is shown at Ep and the equilibrium quantity is shown at Eq.

Equilibrium Point


Shortages

A shortage occurs when, at the current price, the quantity demanded is greater than the quantity supplied; shortages put pressure on prices to rise


Surplus

A surplus is a large, undesired inventory of goods; forces prices to drop to the equilibrium price


Surplus

A surplus is a large, undesired inventory of goods; forces prices to dop to the equilibrium price

Chapter 5SectionMain Menu Activating Strategy, 9.10.

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