The law of Demand and Supply

The law of Demand and Supply

The United States has a free enterprise economy. To make a profit, producers provide products at the highest possible price. Consumers serve their own interests by purchasing the best products at the lowest possible price. The forces of supply and demand establish the price that best serves both producers and consumers.Demand is the desire to have some good or service and the ability to pay for it.

EXAMPLE Price and Demand

Let’s take a look at an example of demand in action. Cheryl has been saving to buy the DVD boxed set .The set costs $69.95. Cheryl goes to the Montclair Video Mart,that the Star Wars set is sold out and a new shipment won’t arrive for a week. She decides to buy some other DVDs , but she also decides to save roughly half of her money . As she looks through the movie DVDs, she sees that most of those she wants sell for $15.Let’s say she decides to buy three and keep the rest of her money . But what if each of the DVDs she wants costs just $5? Cheryl might decide that the price is such a good deal that she can buy seven.

Change in Demand

When national unemployment rises, people who are out of work are more likely to spend their limited funds on food and housing than on entertainment.Fewer people would be buying DVDs at every price, so market demand would drop. Six factors can cause a change in demand: income, market size, consumer tastes, consumer expectations, substitute goods, and complementary goods.

FACTOR 1 Income

If a consumer’s income changes, either higher or lower, that person’s ability to buy goods and services also changes.

FACTOR 2 Market Size

If the number of consumers increases or decreases, the market size also changes. Such a change usually has a corresponding effect on demand.Demand for most items will grow in booming regions and decrease in regions that are shrinking.

FACTOR 3 Consumer Tastes

Because of changing consumer tastes, today’s hot trends often become tomorrow’s castoffs. When a good or service enjoys high popularity, consumers demand more of it at every price. When a product loses popularity, consumers demand less of it.Advertising has a strong influence on consumer tastes.

FACTOR 4 Consumer Expectations

Your expectations for the future can affect your buying habits today. If you think the price of a good or service will change, that expectation can determine whether you buy it now or wait until later.

FACTOR 5 Substitute Goods

Goods and services that can be used in place of other goods and services to satisfy consumer wants are called substitutes.The products are interchangeable, if the price of a substitute drops, people will choose to buy it instead of the original item.Demand for the substitute will increase while demand for the original item decreases.

FACTOR 6 Complementary Goods

When the use of one product increases the use of another product, the two products are called complements. An increase in demand for one will cause an increase in demand for the other. Likewise, a decrease in demand for one will cause a decrease in demand for the other.

The law of supply

Supply refers to the willingness and ability of producers to offer goods and services for sale. Anyone who provides goods or services is a producer. Manufacturers who make anything from nutrition bars to automobiles are producers.

EXAMPLE Price and Supply

The Smiths travel to the Montclair Farmers’ Market every Wednesday and Saturday to sell a variety of fruits and vegetables.However, their specialty crop is the tomato. How should the Smiths decide on the quantity of tomatoes to supply to the farmers’ market? The price they can get for their crop is a major consideration.

The Smiths know that the standard price for tomatoes is $1 per pound.They are willing to offer 24 pounds. The Smiths might decide that the price is so attractive that they are willing to offer 50 pounds of tomatoes for sale on the market.