Unit 2 - Economic Essentials
Learning Target 6: I can explain the concept of supply and demand
If you ever watch two people ball room dance you will notice that they each have their own specific moves in the beginning but eventually come together and dance as one as the song moves on. In business there is a lot of dancing that is going on. In this case the dancing partners are sellers and buyers. Each person has difference motivations too. Generally speaking, sellers are motivated to sell/ produce more if the buyers are willing to pay a higher price. (Law of supply) Buyers are motivated purchase more goods and services if the price decreases (law of demand). As you can see we have a two dance partners with a serious conflict? Or do we? When the buyer and seller come together (exchange) and agree on the sale of a product they come together like our ballroom dancers.
Let’s watch this video to learn more.
One of the dance partners is the consumer or buyer, and they create demands for products and services. The quantity the consumer demands of the product or service depends on the price the sellers are charging as well as how much money the consumer is willing and able to spend. Every single product and service has its own level of demand. Generally speaking, consumers are motivated to purchase more when the price drops. With that, in order for a business to motivate consumers to purchase more of their product or service they will offer an incentive such as a special sale, buy one get one free, etc.…
To visually show this concept we would create a graph that shows the relationship between quantity demanded and the price of a product or service for a particular consumer. This graph is downward sloping and the steepness of the curve is greatly influenced by the consumers’ willingness and ability to purchase this product or service. Unfortunately getting a consumer to purchase more is not as easy as lowering the price. There are some products that a consumer will respond more to a change in price and these products are said to have a price that is elastic. Examples of products that are elastic in nature are clothing, movie tickets, and restaurants. If a change in price does not impact a consumer to purchase more or less that product or service is said to have an inelastic price. Examples of products that are inelastic in nature are items such as health care, gasoline and text books.
The other dance partner is the seller or producer. Producers are motivated to produce more if they believe they can sell it at a higher price which will cover their costs and generate a reasonable profit. As prices in the market goes up producers see an opportunity to make a greater profit which in return will create an incentive for them to supply more goods and services. This is also called the law of supply. To visually show this we create a graph with an upward sloping curve that shows the relationship between the quantity supplied and the price of the product or service.
Elasticity also applies to the supply curve. If a change in price creates a significant change in the quantity produced it said to be elastic. An example of elastic supply would be beef. If the change in price has very little impact in quantity produced it is said to be inelastic. An example of inelastic supply would be electricity.
At the end of the day incentives matter and that impacts supply and demand. If demand exceeds supply then a shortage will happen. Where there is a shortage, price will keep increasing which will decrease demand and the shortage will also decrease until in vanishes or reaches the market clearing price. The opposite of this situation is when supply exceeds demand we will have a surplus.
Make The Connection – Using Uber as your example. Create a presentation why the market Uber operates in is the perfect real life example of supply and demand.