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ECONOMICS – SUPPLY AND DEMAND

The United States is a market economy, or the actions of the buyers and sellers can determine which goods and services will be produced and how they will be produced and distributed.

Demand is the amount or quantity of goods and services that consumers are willing and able to buy at various prices.

  1. Explain the law of demand

Let’s look at supply and demand graphically. Consumers are willing to purchase cookies at the following prices:

Demand Schedule for Cookies

At a price of / Consumer will buy
.70 cents / 100 cookies
.60 / 200
.50 / 400
.40 / 700
.30 / 1,100
.20 / 1,600
.10 / 2,300
  1. How many cookies are consumers willing to buy at 60 cents?
  1. How many cookies are consumers willing to buy at 30 cents?

Many times, economists look at things graphically and plot what is known as a demand curve. The price is always on the vertical axis and the quantity is always on the horizontal axis. For instance, if we were to graph the following chart, the charted graph will look like this:

Supply is the amount of goods and services that producers will provide at various prices.

  1. Explain the law of supply

Producers are willing to supply cookies at the following prices:

Supply Schedule for Cookies

At a price of / Sellers will offer
.70 cents / 2,000 cookies
.60 / 1,800
.50 / 1,600
.40 / 1,400
.30 / 1,100
.20 / 700
.10 / 100
  1. How many cookies are sellers willing to sell at 50 cents?
  1. How many cookies are sellers willing to sell at 10 cents?

The accompanying supply curve would be drawn like so:

7.So, how is price determined? By the market or equilibrium price. Equilibrium price is the price at which the amount supplied and the amount demanded meet. So to determine the equilibrium price for cookies, you will need to chart the supply and demand next to each other. Using the information in the above charts, fill in the correct numbers

Supply and demand of cookies
Consumers will buy / At a price of / Sellers will offer
100 / .70 cents / 2,000
.60
.50
.40
.30
.20
.10

The chart would be graphed as the following:

  1. So, what is the equilibrium price?
  1. What is the quantity demanded at the equilibrium price?

Supply and demand affect each other and determine prices. If too many cookies were supplied, and not enough consumers demanded them, there would be a surplus, and the price would decrease. For instance, clearance sales are a good example. A shortage occurs if there is an undersupply at a certain price. If the supply is low, but there is a large demand for a good or service, such as the case with gasoline, the price would increase.

Answer the following questions:

  1. Workers in a ketchup factory go on strike. What will happen to the supply of ketchup? Will it increase or decrease?
  1. Workers in a ketchup factory go on strike, what will happen to the price of ketchup? Will it increase or decrease?
  1. A heavy frost in Florida severely impacts the orange crop. What will happen to the supply of oranges? Will it increase or decrease?
  1. What will most likely happen to the price of oranges after the heavy frost in Florida? Will it increase or decrease?
  1. The latest movie star endorses a new line of clothes. Demand greatly increases. What will happen to the price of these clothes? Will it increase or decrease?
  1. The bird flu virus affects many poultry products. Chickens are now scarce. What do you think will happen to the demand for beef? Will it increase or decrease?

Surpluses and shortages can affect prices, as well as changes in consumer demand or the change in the amount produced. For instance, consumer taste or preference can affect supply and demand, as with the case of a movie start endorsing a new line of clothes. Consumers will demand the new clothes, so the price will increase. Substitutes of products may also affect demand, as with the case of the bird flu virus question. If chicken is not available, consumers may demand the substitute for the chicken, or they may choose beef. So with a decrease in chickens, the demand and price of beef will rise.

Substitutes are products that consumers will purchase instead of another product. Complements are items that are used to make a product, or go with the product. For instance, consider the good of coffee. The complements of coffee are coffee beans, sugar, and milk. A substitute for coffee could be tea. If the price of coffee increases, the demand for the substitute, or tea, will rise.

Consider the good, the Hummer. Obviously, complements are the materials used to make the Hummer, but also a complement is gasoline. The Hummer does not get very good gas mileage and the gasoline prices have dramatically risen.

  1. What will happen to the demand for the Hummer when the gas prices increase?
  1. What will happen to the price of the Hummer as gas prices increase?
  1. The substitutes for the Hummer will increase as gas prices increase. What are substitutes for a Hummer?
  1. What do you think that the makers of the Hummer, have or will do since gasoline prices have increased?

So, why can certain sports stars and movie stars command such a large salary? Supply and demand. Once they become popular and are in great demand, they can increase their asking price since the supply of popular movie/sports stars is low.

  1. Utilizing the concept of supply and demand, explain why different occupations get paid different salaries. For instance, compare the salaries of fast food workers, who make on the average minimum wage with that of plumbers, who make three to four times that amount. Explain both how supply and demand affect price or worker income.