Supply and Demand
In the Chapter 4 Exercises section, complete the matching and multiple-choice questions.

Supply and Demand
Read this assignment. Then read Chapter 4 in your textbook.

What Are the Laws of Supply and Demand?
Demand is the amount of a good or service that buyers are willing and able to purchase at any price. Price and demand have an inverse relationship, meaning that as price goes up, the amount demanded of the product goes down. This relationship is known as the law of demand.

Why does demand change in the opposite direction of price change?

At a lower price, people can afford to buy more of an item than they can at a higher price.
At lower prices, people tend to buy things as a substitute for something else.
When thinking about demand, make sure to consider opportunity cost. A lower price means a lower opportunity cost. A person is giving up less by deciding to use limited resources on a cheap product; therefore, more people demand that product.

Another reason for the inverse relationship between price and quantity demanded is a concept known as the law of diminishing marginal utility. Utility is an economic term for the enjoyment or usefulness a person gets out of making a decision or consuming a product. As you consume more and more of a specific good, your enjoyment of that good tends to decrease with each additional good consumed. For example, a person may greatly enjoy the first slice of pizza he or she eats, still enjoy the second slice (if to a lesser degree), and as he or she begins filling up on pizza, enjoy the third slice least of the three. Because of this diminishing enjoyment, prices need to be lower before the second or third or fourth items are bought and consumed.

The rate with which quantity demands changes in reaction to a price change will vary, depending on the elasticity of demand of that product or service. Goods that are elastic will experience a large reaction to a change in price.

Supply is the amount of a good or service that’s offered up for sale at all prices. The law of supply states that more of an item will be offered for sale at a higher price than at a lower price. When you think about this law, it makes sense. Sellers want to maximize their profits, and if the price of a good increases, it's a good idea to offer more of that product for sale. An industry with higher prices may attract more businesses to join it.

Just like demand, supply may be elastic or inelastic. Elastic means a big reaction to a change in price, so inelastic means a small reaction to a change in price. An elastic supply means that the business or industry is in a position to quickly increase production in reaction to a price increase. An inelastic supply is one for which it's difficult to increase production, even with a large increase in price.

How Do Changes in Supply and Demand Affect Price?
Infographics show Nonprice factors affecting demand and Nonprice factors affecting supply.Nonprice Factors that Affect Supply and Demand
Up until now, we've looked at reaction to price change. This section deals with how the amount supplied and demanded might change regardless of price.

Be sure to read pages 57–59 of your textbook for an in-depth explanation of the non-price factors affecting supply and demand. With all other factors held constant, an increase in demand or a decrease in supply will result in a price increase. A decrease in demand or an increase in supply will result in a price decrease.

Why Are Prices Important in a Market Economy?
In a market economy, prices act as signals to buyers and sellers, encourage efficient production, and determine who will receive the items produced. Prices constantly fluctuate with changes in supply and demand and act as an indicator of what an economy feels the value of any given good or service should be. Read about the role of prices on pages 59–60 of your textbook.