Putting It Together:
Producers supply…
Consumers demand…
Supply and demand set prices.
Who makes decisions in economics?
In economics, producers and consumers make choices.
Producers are people/businesses who make goods and services
Consumers are People/ businesses who purchase and use goods and services
What are the big concepts that influence producers?

___Scarcity______________________: All people have wants and needs; however, there are a limited
number of resources and goods. There is an inability to satisfy all wants at the same time. This requires
that choices be made. When making choices, producers must consider the fundamental problem in
Economics: How do we satisfy our wants and needs with a limited amount of resources?

__________Price______________: Producers must decide how much they will ask from consumers in
exchange for their good or service – this is the price. When making a choice about setting a price,
producers must think about: At this price, how much are we willing to sell and how much are consumers
willing to buy?
1. ____Supply________ refers to the various quantities of a good or service that producers are willing to sell
at all possible market prices.
 Quantity supplied varies according to price.
 As the price for a good rises, the quantity supplied rises and the quantityfalls.
 As the price falls, the quantity supplied falls and the quantity demanded rises.
2. The law of supply holds that producers will normally offer more for sale at higher prices and less at lower
prices.
3 .Businesses provide goods and services hoping to make a profit. Profit is the money a business has left over
after it covers its costs. Higher prices mean higher profit for producers. Higher profits are an incentive to
produce more.
CHANGES IN SUPPLY
1. Changes in supply can occur when there are changes in:
• Cost of resources
Businesses use the Four Factors of Production to produce goods and services.
1. Natural
Resources
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Soil
Water
Forests
Raw materials/
minerals
2. Human resources
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Skills
Knowledge
Energy
Physical capabilities
3. Capital Resources

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Money
Machinery
Factories
Equipment
Trucks
tools
4. Entrpeneurs/management
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Owners of sole
proprietorships
Partners
Corporate managers
When prices of these resources fall, costs of production fall. Producers are then willing and able to offer more
of the product for sale at each price.
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Cost of wages – If you have more people working, you can make more products, but your
expenses for wages will also go up. If you reduce the number of people you have working, production
goes down and so do your expenses for wages.
Productivity changes- When productivity rises, this reduces the company’s costs. When productivity
falls, production costs go up.
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Government policies –More government regulations can restrict supply. Relaxed
regulations lower the cost of production. Higher taxes mean higher costs causing supply to drop.
Lower taxes increases supply.
Number of producers: The more producers you have, the greater the supply.
Producers expectations: If they expect strong consumer demand, they will produce more. If they
expect weak demand, they will produce less.
Supply elasticity – the measure of how the quantity supplied of a good or service changes in
response to changes in price. Supply elasticity depends on how quickly a company can change the
amount it makes in response to price changes. Products that cannot be made quickly or that are
expensive to produce tend to be supply inelastic.
Surplus and Shortage
1.
A surplus is the amount by which the quantity supplied is higher than the quantity demanded.
a) A surplus signals that the price is too high. At that price, consumers will not buy all of the product that
suppliers are willing to supply.
2.
A shortage is the amount by which the quantity demanded is higher that the quantity supplied.
This signals that the price is too low
At that price, suppliers will not supply all of the product that consumers are willing to buy. In a competitive
market, a shortage will not last. Sellers will raise their price.
Wait a minute, why is price so complicated for producers?
*Price is determined by the interaction of Supply and Demand.
The amount a PRODUCER is willing to sell at a certain price is called Supply.
The amount a CONSUMER wants to buy at a certain price is called Demand.
*How do supply and demand interact?
When the price is high, PRODUCERS will want to sell more, but CONSUMERS will want to buy Less
When the price is low, PRODUCERS will want to sell _less_, but CONSUMERS will want to buy more
*So how is a price set?
When CONSUMERS will buy exactly what PRODUCERS will sell, we have reached equilibrium.
This will be the price_ of the good.
Consumers have to make decisions too! DEMAND!!!
Producers aren’t the only ones who make economic decisions. You do too!
What are the big concepts that influence consumers?
 _____PRICE____: Consumers exchanged money for a good or a service.
When making choices, consumers must consider: How much of the
good or service do we want to buy at this specific price?
 __CONSUMER PREFERENCE___: Consumers make purchases based on what goods and
services they prefer to buy. When making choices, producers and consumers must
consider: What good or service do we like and prefer to buy?
 _OPPORTUNITY COST_: When making a choice, producers and
consumers must consider the options; however, they also must
consider what is given up when a choice is made – the highest valued
alternative forgone. When making choices, producers and consumers must consider:
What am I giving up by making this choice? What is the next best use of my
time or money?
1. Demand: the desire, willingness, and ability to buy a good or service.
 In order for demand to exist:
a. Consumer must want it
b. Consumer must be willing to buy it.
c. Consumer must have the resources to buy it
To make buying decisions, we consider whether the satisfaction we expect to gain
is worth the money we must give up.
Law of demand: Consumers will demand more products when they can buy
them at lower prices and fewer products when they must buy them at higher
prices.
Our market economy
eliminates shortages and
surpluses. Over time, a
surplus forces the price
down and the shortage
forces the price up until
supply and demand are
balanced.
Changes in Demand=
Demand changes when:
 More consumers enter the market

Incomes change: when there is
more employment, more money – people are willing to pay for more of a
product at any price. If people lose jobs and there is less income, they buy less
and demand
goes down
 Tastes change – when products are popular, demand goes up. As popularity goes down,
demand goes down

Expectations change – If people think hard times are coming they spend less
money. If they think there will be shortages, demand goes up.
Elasticity of Demand= When prices rise, demand goes down. When prices go down, demand goes up.
Demand elasticity is the extent to which a change in price causes a change in the quantity
demanded for a product.
• Demand is more elastic when there are substitutes.
•
•
•
Expensive items are more elastic because consumers are
less willing to pay even more for goods that are already
expensive.
The demand for some goods is inelastic:
Price changes have little effect on the demand
Such as goods with few or no substitutes: medicine,
electricity
Other necessary items: Turkey at Thanksgiving
Equilibrium Price =
•
•
In the United States, the forces of supplyand demand work together to set prices.
The point where they achieve balance is the equilibrium price. At this price, there is no
shortage nor surplus
Notice where Supply EQUALS Demand.
This becomes the price of the product.
How is PRICE determined?
Using the table on the right, graph the supply and demand curves. Remember:
What People Want to BUY is DEMAND
What Sellers Want to SELL is SUPPLY
Graph Questions:
1. What would the producer supply at $4?
What would the consumer demand at $4?
Why is it a problem if the price is $4?
2. What would the producer supply at $1?
What would the consumer demand at $1?
Why is it a problem if the price is $1?
3. Because of supply and demand, what will the price be?
4.
What happens if supply or demand changes?
Update #1: The metal used to make widgets is becoming scarce!
Because metal is hard to get, producers do not want to sell as
many widgets for each price. In red pen or red colored pencil,
draw a new supply curve on the graph above based on the
information shown. What would the new price be? ________
Update #2: Widgets have been in stores for ten years and are no
longer cool. No kids want to play with them anymore, so
consumers don’t want to buy as many widgets for each price. In
green pen or green colored pencil, draw a new demand curve on
the graph above based on the information shown. What would
the new price be now after update #1 and update #2? (Hint:
Where do the red and green line intersect?) _______
Think About It: Based on updates one and two, why do prices change?
Price of Widgets
$1.00
$2.00
$3.00
$4.00
Price of Widgets
$1.00
$2.00
$3.00
$4.00
Update #1
Number of Widgets Sellers
Want to Sell
1
15
20
40
Update #2
Number of Widgets Buyers
Want to Buy
20
15
13
10