Supply, Demand, and Competition

Lesson 5

Supply and DemandBusinesses use supply and demand to decide what products to produce and how to price products and services.

Producers and ConsumersThe economy of the United States is based on

providing consumers with the goods and services they need and want.Consumers are the people who buy and use

goods and services.Producers are the people and businesses that

provide these goods and services for the consumers.

The goods and services made available to consumers are determined by supply and demand.

Supply and DemandSupply is the number of items ready for sale.

Demand is the number of items consumers want to purchase.

Supply CurveAs prices increase,

the supply available also increases.

As prices decrease, the supply available also decreases.Direct relationship

Demand CurveAs price of an item

increases, the quantity demanded decreases.

As the price of an item decreases, the quantity demanded increases.Indirect or inverse

relationship.

Law of Supply and Demand1. The price of an item will go down if the

supply increases or the demand for that item decreases.

2. The price of an item will go up if the supply decreases or the demand for that item increases.

Equilibrium PriceThe price at the point

where they cross is important because consumers will demand the same amount that producers will supply at that price.

Market Clearing Price— The price at which all of the products or services brought to market is consumed.

Surplus and ScarcitySurplus ScarcityIf the supply of an item

is greater than its demand by consumers, then there is a surplus of that item.A surplus causes the

price of the item to decrease.

When the consumers’ demand for the item is greater than the supply, this results in a scarcity.Scarcity causes the

price of the item to increase.

SurplusThe surplus in the

graph to the left is the triangle space above the supply curve and below the demand curve.

Supply

Demand

Early Examples of Supply and Demand

Early Examples of Supply and DemandJamestown Colony prospered from tobacco

production.Tobacco sold for very high prices in England

due to the high demand for the product. This encouraged settlers to plant more tobacco to

take advantage of the high prices.

Early Examples of Supply and DemandIn 1849, gold was discovered in California.People from all over the world rushed to CA

to get rich in the gold fields.With limited supplies of goods and services

available to the prospectors, the prices of items such as food, lodging, and supplies skyrocketed.

Early Examples of Supply and DemandAfter the Civil War, small farms operated by

sharecroppers and tenant farmers replaced the large plantations. With few resources, the farmers depended on

credit to purchase the goods and services they needed.

To repay their debts, farmers grew cotton as a cash crop.

Eventually more cotton was produced than could be sold, and the price of cotton fell

drastically.

Today

TodayThe cost of energy is a concern for consumers.

One form of energy is fossil fuels. Oil is a fossil fuel that is a nonrenewable resource.

There is a limited supply available. As other nations build more factories, drive more cars,

and buy more computers, the rising demand for oil causes an increase in oil prices.

Future demand by individuals, businesses, and nations for fossil fuels will continue to cause increases in the price of fossil fuels, unless the demand can be satisfied by alternative energy sources.

Video- Supply and DemandSupply and Demand

Competition

CompetitionCompetition— Competition occurs when more than

one business offers the same good or service. Competition increases production and efficiency

because it motivates a business to offer goods at better prices or a better quality than their competitors. 

For this reason, when many businesses are competing with each other for customers, the prices of goods or services often go down. 

On the other hand, when there is no competition, a business can charge any price it wants for a good or service. Competition is very important to the economy.

ProductivityProductivity— The measurement of efficiency by

comparing output produced by a business to the resources, labor, and capital put in to producing goods.Businesses always have an incentive to improve

their productivity.  With increased productivity, a firm can use fewer

resources to create the same amount of goods.A firm will then be able to spend more on

resources, such as labor and materials. In turn, the firm will be able to increase its output and/or

reduce its price. This will increase the supply of the good, which will reduce the price consumers pay.

The Effects of CompetitionTechnological innovations in the 20th century

changed the way of life for many people. Jobs that were previously complex or time

consuming became simpler because of new technology. 

People were able to do more things in a shorter period of time both at work and in their homes. 

These innovations increased the average person's productivity.  A person's increased productivity and ability to handle

tasks more easily created an increase in standard of living.

The Effects of CompetitionIn a market economy, consumers dictate

what is produced and how much they are willing to pay for the products. If they feel a good is over-priced or isn't useful,

they will not purchase it. Businesses have to respond to consumers'

actions or face going out of business.  In this way, businesses are encouraged to keep prices

low and continuously improve their products.  With more quality goods available, consumers will

experience a higher standard of living.

Other Important TermsStandard of Living— The level of material

comfort of a people or nation as measured by the goods, services, and luxuries available to them.

Free Enterprise System— An economic system in which the people and businesses work together to conduct economic activity with no government involvement. When the United States government was being formed,

people were eager to set up this type of system because they didn't want the government interfering with the economy.

Video- The Way We Live-Working World: The Economy and WorkThe Way We Live-Working World: The Econo

my and Work