Supply and demand

• Price mechanism

  The forces of demand and supply in determining the price and quantity of a good or service
• Purpose of supply and demand

  • They determine the price for a good or a service
• How supply and demand work together to determine price

  1. The forces of supply and demand act in opposite ways

  2. Eventually, the producer and consumers will come to an agreement with the price
• Law of demand

  As prices increase, demand for that good or service decreases. If the price decreases, the demand for that good or service increases
• Law of supply

  As prices for a good or service increase, the quantity supplied will increase. If the price decreases, the supply of that good or service will decrease
• Equilibrium

  The point at which the demand and supply curve intersect, where buyers and sellers agree on a price and exchange the good or service for money
• Changes in demand

  Cause a shift in the entire demand curve and change the equilibrium price and quantity
• Increases in supply

  Cause the supply curve to shift to the right
• Decreases in supply

  Cause the supply curve to shift to the left
• Surplus

  Extra or too many goods that could not be sold
• Producer sets price too high

  Causes a surplus
• Price set above equilibrium price

  Causes a surplus
• Shortage

  Not enough or too few goods to meet the demand of the consumers
• Producer sets price too low

  Causes a shortage
• Price set below equilibrium price

  Causes a shortage
• Other factors that can determine price

  • Government may fix (set) the price of some goods and services
• Price ceiling

  When the government sets a maximum (highest) price for a good
• Price floor

  When the government sets the price for a good or service at a minimum (lowest) price