1 Demand, Supply, and Market Equilibrium
Learn how demand and supply describe buyer and seller plans, how markets reach equilibrium, and how price changes and other determinants affect market outcomes.
and curves
A curve shows the quantities of a good consumers are willing and able to buy at different prices, with other influences held constant. Price is conventionally shown on the vertical axis and quantity on the horizontal axis. The law of states that, other things equal, a higher price leads to a lower , while a lower price leads to a higher . curves therefore usually slope downward.
A curve shows the quantities producers are willing and able to sell at different prices, with other influences held constant. The law of states that, other things equal, a higher price leads to a higher , while a lower price leads to a lower . curves therefore usually slope upward.
The terms describe different things: and refer to the whole price–quantity relationship, while and refer to amounts at a particular price.
Finding
occurs where the and curves intersect. At that point, the quantity consumers plan to buy equals the quantity producers plan to sell. The corresponding price is the , and the amount traded is the .
Consider a market with the following schedule:
At $2 per item, is 80 and is 20.
At $4 per item, is 60 and is 40.
At $6 per item, is 40 and is 60.
At $8 per item, is 20 and is 80.
At $4, buyers want 60 items but sellers offer 40, so there is a , or excess . At $6, sellers offer 60 items while buyers want 40, so there is a , or excess . The schedules cross between those prices, and equilibrium is the price and quantity at their intersection. Shortages and surpluses indicate that the market is away from equilibrium and create pressure for the price to adjust toward the price at which buyers’ and sellers’ plans match.
Movements along curves and shifts
A change in a good’s own price causes movement along its existing curve, not a shift of the curve. For example, when the price of apples falls, consumers move to a point with a greater on the same curve. When the price rises, producers move to a point with a greater on the same curve.
A shift occurs when a factor other than the good’s own price changes how much consumers want to buy or producers want to sell at each possible price.
shifts right, or increases, when consumers want more at every price. It shifts left, or decreases, when they want less. Possible influences include tastes, income, prices of related goods, population, and expectations.
shifts right, or increases, when producers are willing or able to sell more at every price. It shifts left, or decreases, when they are willing or able to sell less. Possible influences include input costs, technology, taxes or subsidies, the number of sellers, and expectations.
The distinction is that a change in the good’s own price changes or along a curve, while a change in another determinant changes or by shifting a curve.
How shifts change equilibrium
To analyze a market change, identify which curve shifts, determine the direction of the shift, and compare the new intersection with the original one. The following outcomes apply when the other curve is unchanged:
An increase in , shown by a rightward shift, raises the and .
A decrease in , shown by a leftward shift, lowers the and .
An increase in , shown by a rightward shift, lowers the and raises the .
A decrease in , shown by a leftward shift, raises the and lowers the .
A popular new use for coffee can increase , shifting the curve right. The new equilibrium has a higher price and quantity. The higher market price then causes movement along the unchanged curve, so sellers a greater quantity. This movement does not mean that itself shifted.
If and both shift at once, the final price or quantity may be uncertain without knowing the relative sizes of the shifts.