Fundamentals of Economics
Productive resources are limited and allocated in a variety of different ways. An efficient way to allocate productive resources is through markets.
5. Markets exist when consumers and producers interact. When supply or demand changes, market prices adjust. Those adjustments send signals and provide incentives to consumers and producers to change their own decisions.
A market exists whenever buyers and sellers exchange goods and services. Exchanges occur almost anywhere, through face-to-face transactions, the Internet, by phone or via mail order.
The market price, also referred to as the equilibrium price, is reached (and illustrated) when the demand and supply curves intersect. If the price of a good or service is below the equilibrium price, there will be a shortage. As a result of a shortage, price will rise, quantity supplied will increase and quantity demanded will decrease, eliminating the shortage.
It the price of a good or service is above the equilibrium price, there will be a surplus. As a result of a surplus, price will fall, quantity supplied will decrease and quantity demanded will increase, eliminating the surplus.
The demand for a good or service shifts when there is a change in:
- Consumer’s preferences or incomes;
- The prices of related goods or services; and
- The number of consumers in the market.
The supply of a product shifts when there are changes in:
- The prices of productive resources used to make the good or service;
- Number of sellers in a market;
- The opportunities for profit available to producers of other goods or services; and
- The technology used to make the good or service.
Expectations for Learning
Analyze how markets adjust to changes in supply and demand and how these adjustments send signals and provide incentives to consumers and producers to influence their own decisions.
Use supply-and-demand model charts to demonstrate the shifting nature of supply and demand.