How Do Consumers and Producers Affect Prices? | Social Studies

March 24, 2016 Jennifer Brandt

How Do Consumers and Producers Affect Prices? | Social Studies 

When you go to the store, do you ever wonder why certain items cost what they do?

The answer to this question is important to understand. According to the International Monetary Fund, the price of any product or service is determined by supply and demand. Supply and demand are determined by advances in technology and the rate at which people buy, or consume, products.

To make sense of this TASC Test Assessing Secondary Completion™ high emphasis topic, let’s discuss these terms individually, and then look at how they relate and affect prices.

Supply and Demand Terms 

A product is a good or service that is made or provided and marketed for sale. The following are examples of products:

  • Cars, tires, oil changes
  • Financial services: loans, tax preparation and filing
  • Milk, eggs, cheese
  • Houses, furniture, lawn mowers
  • Beauty services: haircuts, manicures, massages 
  • Child care services: babysitting, day care, summer camp

Supply is the total amount of a specific good or service (product) that is available to consumers, according to Investopedia.com.

  • When the supply of a product or service goes up, the price of the product or service goes down, according to YourDictionary.com.

Demand describes a consumer's desire and willingness to pay a price for a specific good or service (product), according to Investopedia.com.

  • When the demand for a product or service is high, but the supply of the product or service is low, the price of the product of service increases, according to YourDictionary.com.

A consumer is a person, company, or country who purchases goods and services (products). For example,

  • Alice is a consumer of bananas.
  • Joe’s Printing Company is a consumer of paper.
  • The United States is a consumer of crude petroleum oil.

A producer is a person, company, or country that makes, grows, or supplies goods and services (products). For example,

  • John is a producer of corn, wheat, and soy beans.
  • The Juice Bar is a producer of fresh pressed organic juice.
  • Germany produces Volkswagen vehicles.

How Consumers and Producers Affect Prices

To understand how consumers and producers affect prices, we must understand the concept of supply and demand. According to Investopedia.com, supply and demand is one of the most fundamental concepts of economics and is the backbone of most economies. We can see how consumers and producers affect prices through the laws of supply and demand:

The Law of Demand 

The higher the price of a good or service (product), the less consumers will demand that good or service. Consumers will more than likely avoid buying a product that is more expensive than they are willing to pay. Depending on the product, low demand could eventually bring the price of a product down because the supply will be high.

The Law of Supply 

The higher the price of a good or service (product), the higher the quantity supplied. Producers supply more goods or services at a higher price because selling a higher quantity at a higher price increases revenue (income).

Read more about the basics of supply and demand at Investopedia.com.

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