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Supply & Demand

Supply and demand affects almost everything you do. When you visit the mall to scoop up the newest fashions, snag a copy of the latest video game, or have your hair cut in the newest style, you tell stores what types of items and services you are willing to purchase. This is demand ... your ability and willingness to pay for a particular item or service.

The owners of stores are very interested in demand. They use information about what you buy (and how much) when they decide what to offer in their stores. They place orders from manufacturers by looking at what you have purchased in the past and what they think you will buy in the future. This is supply ... the amount of a good or service a seller offers for a particular price and a particular time.

Supply and demand work together in a market economy. For the economy to be successful, businesses need to sell what buyers want and shoppers must be willing to spend their money!

The laws of supply and demand can be a bit tricky if you look at the whole economy at once. So, let's focus on one product ... Real Trees.


Meet Pete

Pete Producer wants to SUPPLY his customers with what they want at a price they are willing to pay.

The amount of a good or service he
can SUPPLY will help decide the cost
his customers will pay.

Pete Producer owns a Real Tree farm (also called an operation). He loves his job and wants to stay in business. So each year, when it comes time to plant new seedlings, he takes a long look at how many trees he sold during the last season. He researches the types of trees people are interested in buying. Then, he makes a prediction about what people will want to buy in the future and adds up what it will cost him to grow the number of trees he believes he needs.

In addition to the research and predictions he must make, Pete has some other issues to think about. He grows several types (species) of trees. So, he must decide how much of each species to plant. Pete must also remember that nature has a way of making things messy. If there is a drought or a disease spreads through his Real Tree crop, he must be prepared to plant extra the following year.

To stay in business, Pete knows that he must pay for managing and running a tree farm. He must buy his seedlings from a nursery and be able to pay workers (including himself) to plant and cultivate the trees. He has to purchase or repair machinery necessary to cultivate his crop. He must purchase the supplies needed to keep the business running smoothly and advertise his trees! Finally, Pete must decide if he is going to sell his trees to a retailer or if he is going to allow consumers to come to the farm and choose their own tree.

Pete, and other Real Tree growers, must think of all of these factors and the costs that go with them when making decisions about what and how much to plant and harvest. Whew!


Concerning Constance

As a consumer, Constance also has some decisions to make. She must decide what species of tree will make her holiday perfect.

When she makes this decision, she has a checklist of things she must think about. She thinks about how much money she can spend, where she will put her
tree and what shape will look best there, the types
of trees that are available in her area, and the
traditions that her family keeps. Finding the answers
to the questions on her list may mean doing some research and shopping around for the best prices.

Because Constance can choose where her tree comes from, the sellers who would like her to be a customer must offer both high quality trees at the right price
AND great customer service. Constance, and other consumers, make their buying decisions by deciding what is most important to them and finding a seller
who can give them what they want!

Constance Consumer is willing to pay for the goods and services she wants ... and she does!

Her DEMAND helps decide what products will be available for sale and how much it will cost!


What if?
So, now we know the part both producers and consumers play in the laws of supply and demand. Now let's take a look at what happens when producers don't produce enough to meet the demand or when consumers don't buy enough to use up the supply. Remember, supply and demand work together. That means that a change in one causes a change in the other.

These changes in supply and demand happen all the time ... and not just for Real Trees. In fact, economists follow the buying and selling patterns of each of us. By looking at the patterns (sometimes called trends), they can make predictions about the future of the economy.

So, next time you go shopping, remember that each time you spend your hard-earned money; you are taking an active part in a market economy!

consumers:
a person who uses a commodity (good) or service

economist:
an individual who studies the economy

laws of supply and demand:
The law of supply says that as the price of something increases, producers will produce or offer more. The opposite is also true ... if the price of something decreases, producers will produce or offer less.

The law of demand says that as the cost of something increases, people will demand (or buy) less. The opposite is also true ... if the cost of something decreases, people will demand (or buy) more.

manufacturers:
individuals or businesses who make goods by and or machinery

market economy:
an economic system where buyers and sellers trade goods and services using the laws of supply and demand.

In a market economy, both buyers and sellers play a part in deciding what will be available for sale and how much it will cost.

The United States is an example of a market economy.

producers:
someone who makes or manufactures


Try your hand at these questions about supply and demand!

Exercise Your Mind!


These titles are all about economics ... read on!

Neale S. Godfrey's Ultimate Kids' Money Book
Neale S. Godfrey

The Everything Kids' Money Book
Diane Mayr


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