THE THEORY OF

SUPPLY AND DEMAND

 

DO THE FOLLOWING EXERCISE IN YOUR NOTEBOOKS

 

People act in their own self-interest.  Producers want to sell at the highest possible price, and consumers want to buy at the lowest possible price.  Decisions to buy and sell create economic forces of supply and demand.  The interaction of these forces determines the price of goods.  Generally, if the supply is high and the demand is low, the price will be low.  If the supply is low and the demand is high, the price will be high.

 

DEMAND: the number of consumers willing and able to purchase the product

            at a given price.

 

SUPPLY: the amount of the product producers are willing and able to produce at a given price.

 

 

ACTIVITY: Plotting supply and demand curves on a graph.

 

1. Draw a vertical and horizontal line and put 0 where they intersect.

 

2. The horizontal line will measure quantity, the vertical line will measure price.

 

3. Use the following information to plot the supply and demand curves.

 

Supply & Demand Schedule for CD’s

 

            Supply Schedule                                                    Demand Schedule

                              No. of                                                                           No. of

Price               Items supplied                                 Price               Items demanded

$5.00                          100                                         $5.00                          600

10.00                          200                                         10.00                          500

15.00                          300                                         15.00                          400

20.00                          400                                         20.00                          300

25.00                          500                                         25.00                          200

30.00                          600                                         30.00                          100

 

 

ACTIVITY: Graph Interpretation

 

Use the information from the graph to determine the best answer, then write it on the line beside the statement.

 

_____ 1. If the price of the item is too high, there will be A) a competitive market, B) a shortage of items, C) an over-supply of items, D) excess demand.

 

_____ 2. The equilibrium price, the point where supply and demand curves intersect is A) $15, B) 17.50, C) $10.00, D) 5.00

 

_____ 3. If the price is $10, there will be A) a shortage of items, B) a surplus of items, C) an adequate but not abundant supply of items.

 

_____ 4. Demand is greatest when the price is A) $15 B) $5 C) $25 D) $30

 

_____ 5. If the price is $20, there will be A) an increase in demand, B) a decrease in supply, C) a surplus of items, D) more people will want the product.

 

 

ACTIVITY: Understanding causes of supply and demand shifts.

      For each situation state the likely effect on the supply or demand for an item.

 

1. A shoe company enlists the hottest basketball star to promote its sneakers.

 

2. A condom company is being sued for allegedly producing a faulty product.

 

3. Compact discs cost a fraction of what it takes for producers to make a conventional record album out of vinyl.