Chapter 8 – Demand, Supply, & Prices

Law of Demand – Consumers will buy a greater quantity of products at a lower price than at a higher price. (Changes in Demand – substitution, complements, tastes and preferences, population, price expectations, & change in income.)

Law of Supply – Producers will produce a greater quantity at higher prices than at lower prices. (Changes in Supply – Cost of inputs [land, labor, capital investments, & entrepreneurship], technology, government, & disasters)

Equilibrium – When quantity demanded matches quantity supplied, the market is in equilibrium. There is no surplus and no shortage. Equilibrium Price is the price at which consumers are willing to buy (quantity demanded) meets the price at which producers are willing to sell (quantity supplied). Equilibrium Quantity is the quantity at which both demand and supply are at equilibrium.

price quantity demanded quantity supplied

$3.00	100	20
4.00	80	40
5.00	60	60
6.00	40	80
7.00	20	100

Equilibrium price = $5.00; Equilibrium quantity = 60

E

S

D

Shortage – When quantity demanded exceeds quantity supplied.

S

D

(Supply is at 30 while demand is at 75)

Surplus – When quantity supplied exceeds quantity demanded.

S

D

(Supply is at 85 while demand is at 40)

Price Floor – Minimum price set by government that is above equilibrium. (Prices increase as a result.)

Price Ceiling – Maximum price set by the government that is below equilibrium. (Prices decrease.)