Price - Demand and Supply Flashcards
What does Supply & Demand mean?
Customers like to buy cheap, businesses like to sell high, the laws of S&D force them to “settle their differences”
What is meant by demand?
The quantity of product that consumers are willing to buy.
What is the law of demand?
As price increases, demand will fall
As price decreases demand will rise
Why does the law of demand work this way?
- At a lower price more people can afford the product
- It becomes cheaper than its substitutes (similar products)
How can a fall in demand & decrease in price badly affect a small business?
- Adversely effects the profits
What is Supply & what is the law?
Supply is the quantity of products a firm is willing/able to make for sale.
The law is that:
- As price increases the quantity supplied increases
- As price decreases the quantity supplied decreases
What happens when a price is low?
Few producers can make a profit, so the supply is small.
What is the Equilibrium?
Where producers & consumers agree
Producers want to sell high, consumers want to buy low, the market forces a compromise.
How does Equilibrium work?
If price is too low = shortage of supply, so producers increase prices
If price is too high = surplus of supply, so producers have to reduce prices to encourage people to buy unsold stock
Eventually producers & consumers agree on price & quantity, this is called equilibrium
