Supply and Demand

Name: ______Class: ______Date: ______

Review of Comparative and Absolute advantage:

Production Possibilities Table

Lira / 20 hotdogs
0 hotdog buns / 10 hotdogs
20 hotdog buns / 0 hotdogs
40 hotdog buns
Mark / 40 hotdogs
0 hotdog buns / 20 hotdogs
30 hotdog buns / 0 hotdogs
60 hotdog buns
  1. Who has the absolute advantage in the production of hotdogs?
  1. Who has the absolute advantage in the production of hotdog buns?
  1. Who has the comparative advantage in the production of hotdogs?
  1. Who has the comparative advantage in the production of hotdog buns?
  1. Who should specialize in the production of hotdogs? Why?
  1. Who should specialize in the production of hotdog buns? Why?
  1. Will Lira and Mark benefit from trade?

Production Possibilities Table

George / 2 mustard
0 relish / 1 mustard
2 relish / 0 mustard
4 relish
Susan / 3 mustard
0 relish / 1.5 mustard
6 relish / 0 mustard
12 relish
  1. Who has the absolute advantage in the production of mustard?
  1. Who has the absolute advantage in the production of relish?
  1. Who has the comparative advantage in the production of mustard?
  1. Who has the comparative advantage in the production of relish?
  1. Who should specialize in the production of mustard? Why?
  1. Who should specialize in the production of relish? Why?
  1. Will Susan and George benefit from trade?

Supply and Demand

In a free market the relationship between the demand for an item and its supply will influence its price. changes in the price of a good or service can also affect demand and supply.

How are demand and supply curves derived:

  • A demand curve shows the relationship between price and quantity that buyers are able and willing to buy.
  • As the price changes, the quantity demanded moves up and down the demand curve.
  • A supply curve, on the other hand, shows the relationship between the price and the quantity that producers are willing and able to supply.

How can one find out what the demand for a product would be?

  • One can give surveys.
  • One can look at market data from previous studies.
  • You should determine how much of a demand there will be for a product at different prices.
  • In general, when the price for a product goes up, people will demand less of that product.
  • Conversely, if the price for that product should go down, people will want to buy more of it.

What are the determinants of demand?

A ______can be put together that shows how much of a good or service will be purchased at different prices

The demand schedule and the graph of the demand curve are just different
ways of presenting the same information.

The law of demand:

The law of demand states that there is an ______between price and quantity demanded.

Law of Demand

One can also establish a ______based on how much of a good or service will be offered at differing prices.

Market equilibrium is when the supply of the product equals the demand of the product. The market for a product will move towards______over time.

Equilibrium can be shown on a graph. It is where the supply and the demand curves intersect.

  • Prices do not remain______.
  • Producers and consumers do not always make decisions that are in keeping with market conditions. Producers sometimes produce a ______or ______.
  • Instead of equilibrium, we have ______.

As prices change, supply of a good or service will usually change also.

What are the determinants of supply?

______is often the main factor but not always; sometimes even if price remains unchanged, other things will cause the supply of a good or service to change.

Determinants of Supply – forces that will cause the entire supply curve to shift either left or right (producers will produce even though the price of the product has not changed.)

Movement along the supply curve:

A change in price will not cause the supply curve to change; quantity will be affected but not the curve itself.

The only change will be along the supply curve. (See, for example, how in the diagram below change in price will cause the supply of a good or service to decrease.)

Demand Shifters:

______- If people have more money, the demand for products can increase.

______- As the population increases, there are more buyers. This will increase demand.

______- Customers may no longer want a product, reducing the demand.

______- If the competitors of a product increase their price, then the demand for your product may increase.

Supply Shifters:

______- If the number of sellers increases, then the supply will increase.

______- Improvements in manufacturing can increase supply.

______- If resources needed to build a product are moved to another product, then supply will decrease.

______- If the costs for making a product increase, the supply will decrease