Economics: Today and Tomorrow © 2012

Chapter 7: Demand and Supply

Chapter Overviews

Section 1: Demand
In a market economy, buyers and sellers set prices. Demand is the amount of something that consumers are willing and able to buy at various prices. Supply is the amount of something that producers are willing and able to sell at various prices. The law of demand states that as price goes up, the quantity demanded goes down, and vice versa. Real income, possible substitutes, and diminishing marginal utility help explain the inverse relationship between price and quantity demanded.

Section 2: The Demand Curve and the Elasticity of Demand
Quantity demanded is based on price. Demand, however, is affected by several factors, called the determinants of demand: changes in population, changes in income, changes in tastes and preferences, substitutes, and complementary goods. A demand curve is the graph that shows the relationship between the price of an item and the quantity demanded. A change in demand for a particular item shifts the entire demand curve to the left or right.

Section 3: The Law of Supply and Supply Curve
The law of supply states that as price goes up, the quantity supplied goes up, and vice versa. Supply, however, is affected by several factors: price of inputs, number of firms in the industry, taxes, and technology. A supply curve is the graph that shows the relationship between price and quantity supplied. A change in supply of a particular item shifts the entire supply curve to the left or right. When a business wants to expand, it has to consider the law of diminishing returns to decide how much expansion will help the business.

Section 4: Putting Supply and Demand Together
The price at which the quantity demanded equals the quantity supplied is the equilibrium price. A shortage occurs when the quantity demanded is greater than the quantity supplied. Shortages put pressure on prices to rise. A surplus occurs when the quantity demanded is less than the quantity supplied. Surpluses put pressure on prices to fall. Sometimes, the government may set a limit on how high (price ceiling) or low (price floor) the price of something may go.