Economics Supply and Demand Supply and Demand Theory

Economics Supply and Demand

Supply and Demand Theory n What is Supply? The amount of goods producers are willing to make and sell

Law of Supply To help you remember, think about the letter “S”: Supply Same n If prices , then supply Why? $$$$ Sellers want to supply a larger quantity of goods at higher prices so they can be more profitable!

What Affects Supply? n Possibility of profit n Amount of competition n Capability of developing and marketing the products and services

Supply and Demand Theory n What is Demand? Consumer willingness and ability to buy products.

Law of Demand To help you remember, think about the letter “D”: Demand Different n If prices , then demand Why? If prices go down, we can afford to buy more! If prices increase, we will buy less.

What Affects Demand? n Strength of want or need n Availability of supply n Availability of alternative products that consumers believe will satisfy their need/want

Supply and Demand When supply and demand interact conditions of surplus, shortage and equilibrium are created n Surplus – occurs when supply exceeds demand n Shortage – occurs when demand exceeds supply n Equilibrium – occurs when the amount of product supplied is equal to the amount of product demanded. = MARKET PRICE n

Supply and Demand Equilibrium

Diminishing Returns n As you add more of something while holding everything else constant, the added benefit received from each additional unit input will eventually begin to decline. n When benefits decrease, you reach diminishing return.

Example of diminishing return n When eating pizza, the first piece is mouth-watering and the second piece is also good. But once you start to fill up, you tend to get less satisfaction out of each additional piece of pizza. n When you become full and cannot consume anymore, you have reached a point where no other piece can add any benefit to you. n This is diminishing return.

Economies of Size n An expansion allows an agribusiness to produce at a lower long-run average cost. n Increasing the size of the business makes it continuously more efficient, thus decreasing the minimum average cost.