Supply and Demand

Microeconomics

What is Marketing?
Principles of Marketing
 Economic Systems

Economic systems determine:

(1) What goods and services should be produced to meet consumer needs?
(2) How should they be produced, and who should produce them?
(3) Who should receive goods and services?
Planned Systems

In a planned system, such as communism or socialism, the

government controls the production and distribution of goods and
services. In a true communist economy, there is no private
property—everyone owns the factors of production. This type of
planned economy is called a command economy.
In a socialist economy, there is some private property and some
private control of industry.
 Free Market System

In a free market system, also known as capitalism, business is

conducted with only limited government involvement. Competition
determines:
• what goods and services are produced
• how they are produced
• for whom
Even in free markets, governments will maintain:
• the rule of law
• create public goods and services such as roads and education
• step in when the market gets things wrong (e.g., setting
minimum wage, establishing environmental standards)
 Mixed Economy

More countries’ economies are evolving into a mixed-

economy which has characteristics of more than one system.
 Demand
The law of demand states
that a higher price typically
leads to a lower quantity
demanded. A demand
curve shows the
relationship between
quantity demanded and
price in a given market on
a graph (right).
Shifts in Demand
 Supply
The law of supply says that a
higher price typically leads to
a higher quantity supplied.
A supply curve (right) shows
the relationship between
quantity supplied and price
on a graph.
Shifts in Supply
 Eqilibrium

The equilibrium price and equilibrium quantity occur where the

supply and demand curves cross since the quantity demanded is
equal to the quantity supplied.
 Surplus and Shortage
When the price is below the
equilibrium level, excess
demand or a shortage will
exist. If the price is above
the equilibrium level, excess
supply or a surplus will exist.
In either case, economic
pressures will push the price
toward the equilibrium level.
 Practice Question

If more people stop eating dairy products, how will this impact the
price of ice cream?
 Quick Review

• What are the major economic systems? How do they differ?

• What are the determinants of demand?
• What the determinants of supply?
• Can you define and graphically illustrate market equilibrium,
surplus, and shortage?