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Economics 14: Lecture 4: Supply and Demand, Part 1
Economics 14: Lecture 4: Supply and Demand, Part 1
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Economics 14
All societies must deal with scarcity and, therefore, must have some way of answering 3 basic
economic questions:
There are two extreme systems for answering these questions. In a communist economy, the
government decides all the answers. In a capitalist economy, the questions get answered through
the interaction of buyers and sellers in the market.
communist economy:
capitalist economy:
A market is a place or service that enables buyers and sellers to exchange goods and services.
3 functions of price:
1. provides incentives
2. means of rationing scarce supplies
3. signaling mechanism
Demand
Demand is the amount people are willing to purchase at each possible price. The amount of the
product people are willing to purchase at a specific price is called quantity demanded.
A demand schedule is a list of the quantity demanded at different prices. When constructing a
demand schedule, everything else that might affect demand is held constant. Consider the
following demand schedule for pizza:
$5 2
4 5
3 8
2 12
1 17
Supply is the amount producers are willing to offer for sale at each possible price. The amount
sellers are willing to offer at a particular price is called quantity supplied. The supply schedule
for pizza would be constructed by adding up the quantities that each producer offers for sale at
each price, holding constant everything else that affects the supply of pizza.
$5 18
4 15
3 8
2 2
1 1