At the end of this section, you will be able to:
- Explain demand, quantity demanded, and the law of demand.
- Identify a demand curve and a supply curve.
- Explain the supply, quantity supplied, and the law of supply.
- Explain equilibrium, equilibrium price, and equilibrium quantity.
First, let's focus on what economists mean by demand, what they mean by supply, and then how demand and supply interact in a market.
Demand for Goods and Services
Economists use the termaskto refer to the amount of some good or service that consumers are willing and able to buy at each price. Demand is fundamentally based on needs and wants: if you don't need or want something, you don't buy it. Although a consumer can differentiate between a need and a want, from an economist's point of view they are the same. Demand is also based on ability to pay. If you can't pay, you don't have effective demand. By this definition, a homeless person is unlikely to have an effective demand for housing.
What a buyer pays for a unit of a specific good or service is calledprice🇧🇷 The total number of units that consumers would buy at that price is calledRequired quantity🇧🇷 An increase in the price of a good or service almost always decreases the quantity demanded for that good or service. On the other hand, a fall in price will increase the quantity demanded. When the price of gasoline rises, for example, people look for ways to reduce consumption by combining several errands, carpooling or public transport, or taking weekend trips or vacations closer to home. Economists call this inverse relationship between price and quantity demandedlaw of demand🇧🇷 The law of demand assumes that all other variables that affect demand (which we'll explain in the next module) are held constant.
We can show an example of the gasoline market in a table or graph. The economist draws up a table showing the quantity demanded at each price, as[Link], onedemand schedule🇧🇷 In this case, we measure the dollar price per gallon of gasoline. We measure quantity demanded in millions of gallons over a period of time (eg, per day or per year) and across a geographic area (such as a state or country). ONEdemand curveshows the relationship between price and quantity demanded on a graph like[Link], with quantity on the horizontal axis and price per gallon on the vertical axis. (Note that this is an exception to the normal rule in math that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical axis. Economics is not math.)
[Link]displays demand schedule and graph in[Link]shows the demand curve. These are two ways of describing the same relationship between price and quantity demanded.
|Price (per gallon)||Quantity Demanded (millions of gallons)|
Demand curves will appear slightly different for each product. They can appear relatively steep or flat, or they can be straight or curved. Almost all demand curves share the fundamental similarity that they slope from left to right. Demand curves embody the law of demand: as price increases, quantity demanded decreases, and conversely, as price decreases, quantity demanded increases.
Confused about these different types of lawsuits? Read the following Clear It Up article.
Is the demand equal to the quantity demanded?
In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or demand schedule. When economists talk about quantity demanded, they are only referring to a certain point on the demand curve or a quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the (specific) point on the curve.
Provision of Goods and Services
When economists talk aboutto provide, means the amount of some good or service that a producer is willing to offer at each price. The price is what the producer receives for selling a unit of a product.bomoService🇧🇷 An increase in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price decreases the quantity supplied.supplied quantity🇧🇷 When the price of gasoline rises, for example, it encourages for-profit companies to take a number of actions: expanding exploration for oil reserves; drill for more oil; invest in more pipelines and tankers to get oil to plants for refining into gasoline; build new oil refineries; purchase additional pipelines and trucks to send gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. Economists call this positive relationship between price and quantity supplied – that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied –law of supply🇧🇷 The law of supply assumes that all other variables affecting supply (which will be explained in the next module) are held constant.
Still not sure about the different types of supplies? Check out the Clear It Up feature below.
Is supply equal to quantity supplied?
In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices, a relationship that we can illustrate with a supply curve or supply schedule. When economists refer to quantity supplied, they are only referring to a particular point on the supply curve or a quantity in the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve.
[Link]illustrates the law of supply, again using the gasoline market as an example. As with demand, we can illustrate supply using a table or graph. ONEsupply scheduleit's a table like[Link], which shows the quantity supplied over a range of different prices. Again, we measure the price in dollars per gallon of gasoline and measure the quantity supplied in millions of gallons. ONEsupply curveis a graphical illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis. The supply table and the supply curve are just two different ways of showing the same information. Note that the horizontal and vertical axes of the supply curve graph are the same as those of the demand curve.
|Price (per gallon)||Quantity Delivered (millions of gallons)|
The shape of the supply curves will vary slightly depending on the product: steeper, flatter, straighter or curved. Almost all supply curves, however, share a basic similarity: they slope upward from left to right and illustrate the law of supply: when price increases, say, from $1.00 per gallon to 2.20 per gallon, quantity supplied increases from 500 gallons to $2.20 per gallon. 720 gallons. Conversely, as price falls, quantity supplied falls.
Equilibrium: where supply and demand intersect
Because supply and demand curve graphs have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, supply and demand determine the price and quantity that will be bought and sold in a market.
[Link]illustrates the interaction of demand and supply in the gasoline market. The demand curve (D) is identical to the one[Link]🇧🇷 The supply curve (S) is identical to[Link].[Link]contains the same information in tabular form.
|Price (per gallon)||Quantity Demanded (millions of gallons)||Quantity Delivered (millions of gallons)|
Remember this: when two lines in a diagram intersect, that intersection usually means something. The point where the supply curve (S) and demand curve (D) intersect, designated by point E at[Link], it's calledbalance🇧🇷 The equilibrium price is the only price where consumers' plans and producers' plans agree, that is, where the quantity of the product that consumers want to buy (quantity demanded) equals the quantity that producers want. sell (quantity supplied). Economists call this common quantitybalanced amount🇧🇷 At any other price, quantity demanded does not equal quantity supplied, so the market is not in equilibrium at that price.
Inside[Link], the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million gallons. If you only had the supply and demand tables and not the graph, you could find the equilibrium by looking for the price level in the tables where quantity demanded and quantity supplied are equal.
The word "balance" means "balance". If a market is at its equilibrium price and quantity, there is no reason to deviate from that point. However, if a market is not in equilibrium, economic pressures arise to move the market toward equilibrium price and quantity.
Imagine, for example, that the price of a gallon of gasoline is above the equilibrium price, that is, instead of $1.40 per gallon, the price is $1.80 per gallon. The horizontal dotted line at the price of $1.80 in[Link]illustrates this above the equilibrium price. With this higher price, quantity demanded drops from 600 to 500. This decrease in quantity reflects how consumers react to the higher price by finding ways to use less gasoline.
Furthermore, at this higher price of $1.80, the quantity of gasoline supplied increases from 600 to 680, since the higher price makes it more profitable for gasoline producers to expand their production. Now consider how quantity demanded and quantity supplied are related to this above-equilibrium price. Quantity demanded decreased to 500 gallons, while quantity supplied increased to 680 gallons. In fact, at any price above equilibrium, the quantity supplied exceeds the quantity demanded. we call itoversupplythe onesurplus.
With excess, gasoline accumulates at gas stations, in tanker trucks, in pipelines and in oil refineries. This accumulation puts pressure on gasoline sellers. If there is unsold surplus, the companies involved in making and selling gasoline are not getting enough money to pay their workers and cover their expenses. In this situation, some producers and sellers will want to reduce prices, because it is better to sell at a lower price than not to sell at all. Once some sellers start slashing prices, others will follow to avoid losing sales. These price reductions, in turn, will stimulate more quantity demanded. Therefore, if the price is above the equilibrium level, the incentives built into the structure of supply and demand will create pressures for the price to fall towards equilibrium.
Now suppose the price is below its breakeven level at $1.20 per gallon, as the horizontal dashed line at that price at[Link]shows At this lower price, quantity demanded increases from 600 to 700 as drivers take longer trips, spend more minutes warming up in the garage in winter, stop carpooling to work, and buy bigger cars. However, the below-equilibrium price reduces gasoline producers' incentives to produce and sell gasoline, and quantity supplied falls from 600 to 550.
When the price is below equilibrium, there isexcess demand, the onelack—that is, at the given price, the quantity demanded, which was stimulated by the lower price, now exceeds the quantity supplied, which was depressed by the lower price. In this situation, eager gas buyers swarm gas stations, only to find that many of them are running out of fuel. Oil companies and gas stations recognize that they have an opportunity to profit more by selling the gasoline they carry at a higher price. As a result, the price rises towards the equilibrium level. Read Demand, Supply, and Efficiency to learn more about the importance of the supply and demand model.
Main Concepts and Summary
A demand table is a table that shows the quantity demanded at different market prices. A demand curve shows the relationship between quantity demanded and price in a given market on a graph. The law of demand states that a higher price generally leads to a lower quantity demanded.
A supply table is a table that shows the quantity supplied at different prices in the market. A supply curve shows the relationship between quantity supplied and price on a graph. The law of supply says that a higher price generally leads to a greater quantity supplied.
The equilibrium price and equilibrium quantity occur where the supply and demand curves intersect. Equilibrium occurs when the quantity demanded equals the quantity supplied. If the price is below the equilibrium level, the quantity demanded will exceed the quantity supplied. There will be excess demand or shortages. If the price is above the equilibrium level, the quantity supplied will exceed the quantity demanded. There will be oversupply or surplus. In both cases, economic pressures will push the price towards the equilibrium level.
Check[Link]🇧🇷 Assume the price of gasoline is $1.60 per gallon. Is the quantity demanded greater or less than the equilibrium price of $1.40 per gallon? And the quantity offered? Is there a shortage or surplus in the market? So how much?
show the answer
What determines the price level in a market?
What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?
Will the demand curves have exactly the same shape in all markets? If not, how will they be different?
Will supply curves have the same shape in all markets? If not, how will they be different?
What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the proportion when there is surplus?
How can you find the break-even point on a supply and demand graph?
If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below the equilibrium level, would you predict a surplus or a shortage? Because?
When the price is above equilibrium, explain how market forces move the market price towards equilibrium. Do the same when the price is below equilibrium.
What is the difference between demand and quantity demanded for a product, say milk? Explain in words and show the difference on a graph with a milk demand curve.
What is the difference between supply and quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the milk supply curve.
critical thinking questions
Check[Link]🇧🇷 Suppose the government decides that since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would result in the gasoline market?
Explain why the following statement is false: "In the market for goods, no buyer would be willing to pay more than the equilibrium price."
Explain why the following statement is false: "In the goods market, no seller would be willing to sell for less than the equilibrium price."
Check[Link]again. Assume the price of gasoline is $1.00. Will quantity demanded be greater or less than the equilibrium price of $1.40 per gallon? Will the quantity supplied be less or more? Is there a shortage or surplus in the market? So how much?
Costanza, Robert and Lisa Wainger. "Nature's No Accounting: How the Mainstream Economy Distorts the Value of Things".the post of washington🇧🇷 September 2, 1990.
European Commission: Agriculture and Rural Development. 2013. “Overview of CAP Reform: 2014-2024”. Retrieved 13 April 2013. http://ec.europa.eu/agriculture/cap-post-2013/.
Radford, R. A. “The economic organization of a P.O.W. To camp."Economic🇧🇷 not. 48 (1945): 189-201. http://www.jstor.org/stable/2550133.
- demand curve
- a graphical representation of the relationship between price and quantity demanded for a particular good or service, with quantity on the horizontal axis and price on the vertical axis
- demand schedule
- a table showing a range of prices for a particular good or service and the quantity demanded at each price
- the relationship between the price and quantity demanded of a particular good or service
- equilibrium price
- the price at which quantity demanded equals quantity supplied
- balanced amount
- the quantity at which quantity demanded and quantity supplied are equal for a given price level
- the situation in which the quantity demanded equals the quantity supplied; the combination of price and quantity where there is no economic pressure of excess or shortage that would cause price or quantity to change
- excess demand
- at the existing price, the quantity demanded exceeds the quantity supplied; also called scarcity
- at the existing price, the quantity supplied exceeds the quantity demanded; also called surplus
- law of demand
- the common relationship in which a higher price leads to a lower quantity demanded of a given good or service and a lower price leads to a greater quantity demanded, all other variables being held constant
- law of supply
- the common relationship in which a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied, all other variables being held constant
- what a buyer pays for a unit of the specific good or service
- Required quantity
- the total number of units of a good or service that consumers are willing to buy at a given price
- supplied quantity
- the total number of units of a good or service that producers are willing to sell at a given price
- at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand
- supply curve
- a line showing the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis
- supply schedule
- a table showing a range of prices for a good or service and the quantity supplied at each price
- to provide
- the relationship between the price and quantity supplied of a particular good or service
- at the existing price, the quantity supplied exceeds the quantity demanded; also called oversupply