Demand and Supply in Economics
Demand and Supply are important concepts in Economics. In this section, we look at some of their main points.
A market is a group of economic agents who are trading a good or service plus the rules and arrangements for trading. If all sellers and all buyers face the same price, it is referred to as the market price. In a perfectly competitive market, sellers all sell an identical good and no one buyer can influence the market. A price-taker is a buyer or seller who accepts the market price. Quantity demanded is the amount of a good that buyers are willing to purchase at a given price. A demand schedule is a table that reports the quantity demanded at different prices, holding all else equal. Holding all else equal implies that everything else in the economy is held constant. The Latin phrase “ceteris paribus” is often used to say this.
The demand curve plots the quantity demanded at different prices. A demand curve plots the demand schedule. Two variables are negatively related if the variables move in opposite directions. The law of demand is when the quantity demanded rises when price falls. Willingness to pay is the highest price that a buyer is willing to pay for an extra unit of a good. Diminished marginal benefit: as you consume more of a good, your willingness to pay for an additional unit declines. The process of adding up individual behaviors is referred to as aggregation.
The market demand curve is the sum of the individual demand curves of all potential buyers. It plots the relationship between the total quantity demanded and the market price, holding all else equal. The demand curve shifts only when the quantity demanded changes at a given price. If a good’s own price changes and its demand curve hasn’t shifted, the own price changes produces a movement along the demand curve.
For a normal good, an increase in income shifts the demand curve to the right, causing buyers to purchase more of a good. For a normal good, a decrease in income shifts the demand curve to the left, causing all buyers to purchase less of the good. For an inferior good, an increase in income shifts the demand curve to the right, causing buyers to purchase more of the good. For an inferior good, a decrease in income shifts the demand curve to the left, causing buyers to purchase less of the good. Two goods are substitutes when a rise in the price of one leads to a rightward shift in the demand curve for the other. Two goods are complements when a fall in the price of one leads to a rightward shift in the demand curve for the other.
The quantity supplied is the amount of a good or service that sellers are willing to sell at a given price. A supply schedule is a table that reports the quantity supplied at different prices, holding all else equal. The supply curve plots the quantity supplied at different prices. A supply curve plots the supply schedule. Two variables are positively related if the variables move in the same direction. The law of supply, in almost all cases, is when the quantity supplied rises when the price rises.
The willingness to accept is the lowest price that a seller is willing to get paid to sell an extra unit of a good. At a particular quantity supplied, willingness to accept is the height of the supply curve. Willingness to accept is the same as the marginal cost of production. The market supply curve is the sum of the individual supply curves of all the potential sellers. It plots the relationship between the total quantity supplied and the market price.
An input is a good or service used to produce another good or service. The supply curve shifts only when the quantity supplied changes at a given price. If a good’s own price changes and it’s supply curve hasn’t shifted, the own price change produces a movement along the supply curve. The competitive equilibrium is the crossing point of the supply curve and the demand curve. The competitive equilibrium price equates quantity supplied and quantity demanded. The competitive equilibrium quantity is the quantity that corresponds to the competitive equilibrium price.
When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded, creating excess supply. When the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied, creating excess demand.
A market is a group of economic agents who are trading a good or service plus the rules and arrangements for trading. In a perfectly competitive market, sellers all sell an individual good or service and individual buyers or sellers aren’t powerful enough on their own to affect the market price of that good or service.
Quantity demanded is the amount of a good that buyers are willing to purchase at a given price. A demand schedule is a table that reports the quantity demanded at different prices, holding all else equal. A demand curve plots the demand schedule. The law of demand states that in almost all cases, the quantity demanded rises when the price falls.
The market demand curve is the sum of the individual demand curves of all potential buyers. The quantity demanded is summed at each price. It plots the relationship between the total quantity demanded and the market price.
The demand curve shifts only when the quantity demanded changes at a given price. If a good’s own price changes and its demand curve hasn’t shifted, the own price change produces a movement along the demand curve.
Quantity supplied is the amount of a good or service that sellers are willing to sell at a given price. A supply schedule is a table that reports the quantity supplied at different prices. A supply curve plots the supply schedule. The law of supply states that in almost all cases, the quantity supplied rises when the price rises.
The market supply curve is the sum of the individual supply curves of all potential sellers. The quantity supplied is summed at each price. It plots the relationship between the total quantity supplied and the market price.
The supply curve shifts only when the quantity supplied changes at a given price. If a good’s own price changes and its supply curve hasn’t shifted, the own price change produces a movement along the supply curve.
The competitive equilibrium is the crossing point of the supply curve and the demand curve. The competitive equilibrium price equates quantity supplied and quantity demanded. The competitive equilibrium quantity is the quantity that corresponds to the competitive equilibrium price. When prices are not free to fluctuate, markets fail to equate quantity demanded and quantity supplied.