Supply, Demand, and Trade
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What you will learn
- 1Define supply and demand and explain how they work
- 2Explain how supply and demand affect the price of goods and services
- 3Classify real-world scenarios as supply factors or demand factors
- 4Define trade and describe how it connects people and countries
Mini Lesson
Two of the most important ideas in economics are supply and demand. Together, they explain why prices rise and fall, why some products are easy to find and others are not, and why people and countries trade with each other.
Supply
- Supply is the amount of a product or service that producers are able and willing to offer for sale at a given time.
- When supply is high (lots of a product available), prices tend to fall — sellers must compete for buyers.
- When supply is low (a shortage), prices tend to rise — buyers compete for limited goods.
- Supply factors (things that change supply) include: natural disasters, factory output, number of workers, transport delays, and weather.
Demand
- Demand is the amount of a product or service that consumers are willing and able to buy at a given price.
- When demand is high (many buyers want it), prices tend to rise — sellers can charge more.
- When demand is low (few buyers), prices tend to fall — sellers lower prices to attract buyers.
- Demand factors (things that change demand) include: population changes, seasons, trends, advertising, and price changes.
How Supply and Demand Affect Price
- If supply goes DOWN (decreases) and demand stays the same, prices RISE (shortage pushes prices up).
- If supply goes UP and demand stays the same, prices FALL (surplus pushes prices down).
- If demand goes UP and supply stays the same, prices RISE (competition among buyers).
- If demand goes DOWN (decreases) and supply stays the same, prices FALL (buyers have less interest).
- Markets naturally adjust prices until supply and demand reach a balance called equilibrium.
Trade
- Trade is the buying and selling of goods and services between people, businesses, or countries.
- Countries trade because no country has everything it needs — they export goods they produce well and import goods they cannot produce efficiently.
- Exports: goods and services a country sells to other countries.
- Imports: goods and services a country buys from other countries.
- Trade allows countries to specialize in what they do best, which usually benefits both sides.
Words to know
supply
The amount of a product or service that producers are able and willing to offer for sale.
demand
The amount of a product or service that consumers are willing and able to buy.
price
The amount of money charged for a good or service.
shortage
When supply is less than demand, causing prices to rise.
surplus
When supply is greater than demand, causing prices to fall.
trade
The buying and selling of goods and services between people, businesses, or countries.
export
A good or service that a country sells to another country.
import
A good or service that a country buys from another country.
Tip: Think of Supply as a shelf — when the shelf is full (high supply), prices drop. Think of Demand as a line — when the line is long (high demand), prices rise. When both are balanced, prices are fair.
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