Supply and Demand

Slide 1: 

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. The amount of a goods that buyers purchase at a higher price is less because as the price of a good goes up, the demand for the product goes down. As a result, people will naturally avoid buying a product that will force them to spend more money on then something else they value more. The chart shows that the line has a downward slope. A, B and C are points on the demand line. Each point on the line represents a direct correlation between demand which is Q and price which is P. So, at point A, the demand will be Q1 and the price will be P1, and so on. The higher the price of a good the lower the demand which you can see at point A, and the lower the price, the more the good will be in demand as you can see at point C.

Slide 2: 

Like the law of demand, the law of supply demonstrates the quantities of good that will be sold at a certain price. But unlike the law of demand, the supply line on the graph has an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling more quantity at a higher price increases revenue. A, B and C are points on the supply line. Each point on the line represents a direct correlation between quantity supplied which is Q and price which is P. At point B, the quantity supplied will be Q2 and the price will be P2. As the producers supply more of the products, then the demand for the product will go down and the outcome of this will be that the price of the product will go down to.

Slide 3: 

Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price. Imagine that a special edition CD of your favorite band is released for $10. Because the record company's previous analysis showed that consumers will not buy CDs at a price higher than $10, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If, however, there are 10 CDs produced and demand is at 5, the price will not be pushed up because the demand is lower then the CDs supplied. In fact after the 5 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining five CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $10 was too high. The middle set of bar represent an event of equilibrium which means that the demand and supply is just the right.