Supply, demand, and market equilibrium | Microeconomics | Khan Academy
Why is the Equilibrium Between Supply and Demand Specifically at The result of this increase in demand while supply remains constant is. In this diagram, supply and demand have shifted to the right. This has led an increase in quantity (Q1 to Q2) but price has stayed the same. The above diagram depicts the prices on y-axis and the quantity demand on x- axis. To understand the relationship between Demand and Supply, it can be constant, an increase in the price of a good or service will decrease demand, and .
This is called an indirect relationship, where if one variable goes up, the other variable goes down. It is easy to see why this should be true; if 20 people have identical houses to sell, and only 15 people want to buy a house, then the buyers can pick the lowest price, so the sellers must try to satisfy the buyers. Of course, if the supply changes, and 5 sellers decide to stay, then there is one house for each buyer, and neither side can bully the other; each buyer will offer money for the house they want, and if the seller thinks it's not enough, he can refuse, since his house will probably be bought anyways.
If 5 more of the sellers decide not to move, then the buyers need to offer more money, because the remaining sellers want to be able to sell their houses for as much money as they can, so they will pick the ten buyers who offer the most money. The inverse is true as well; if the price of a home goes down, fewer people will sell, but if the price of a home goes up, more people will sell.
This means that price and supply are closely linked, and changes in one are reflected in the other. Factors affecting[ edit ] Price: As the price of a product rises, its supply rises because producers are more willing to manufacture the product because it's more profitable now. Price of other commodities: There are two types Competitive supply: If a producer switches from producing A to producing B, the price of A will fall and hence the supply will fall because it's less profitable to make A.
A rise in one product may cause a rise in another. For instance, a rise in the price of wooden bedframes may cause a rise in the price of wooden desks and chairs. This means supply of wooden bedframes, chairs and desks will rise because it's more profitable. If production costs rise, supply will fall because the manufacture of the product in question will become less profitable. Change in availability of resources: If wood becomes scarce, fewer wooden bedframes can be made, so supply will fall.
Demand[ edit ] A desire becomes demand when it meets the three important factors: Similar to supply, there is a relationship between price and demand; the more people want, the more it will cost, if the supply remains the same. To return to our example of houses, let's say there are 15 people selling houses, and 10 buying; the buyers have more influence on the sellers, and the prices will be low.
If 5 more people decide to buy houses, then the price will go up, and if another 5 decide to buy one of these houses, the price will climb even further. Thus when demand is high, the price goes up and consequently the supply contracts; and when the demand is low, the supply expands while the prices go down.
Diagrams for Supply and Demand
The inverse here is true as well; if people will sell their house for less, they will find more people interested in buying. The reason why demand behaves this way is fairly obvious: Likewise, when a good is on sale, or its prices drop, people will become more willing to spend money on it.
Consumer Behavior[ edit ] The way consumers behave can affect demand in many ways. Consumers gain satisfaction from the consumption of goods or services.
This satisfaction is called utility. The law of diminishing marginal utility is a theory in economics that says that with increased consumption, satisfaction decreases. It tastes good and satisfies you, so you have another one, and another etc.
Eventually, you eat so many, that your satisfaction from each hot dog you consume drops. You would only consume another if price drops. But that won't happen, so you leave, and demand for the hot dogs falls.
Consumer surplus is a term used to describe the difference between the price of a good and how much the consumer is willing to pay. Back at the park, they are still selling hot dogs, but now for 80 cents. For each hot dog, you get 20 cents of consumer surplus The income effect occurs when the incomes of consumers change.
But over the weekend, you got a pay rise, and have more money in your pockets! The substitution effect is similar. But, on the other side, the rival hot dog stand now sells hot dogs for only 50 cents. You are more likely to go to that stand because it is cheaper. Demand Curve[ edit ] A curve that shows the relationship between the price level of a good and the quantity of the good demanded at that price is called the demand curve at any given point in time.
Demand curves are graphed with the same axis as supply curves in order to allow the two curves to be combined into a single graph: Demand curves usually slope downward because people are willing to buy larger quantities of a good as its price goes down.
That is, low prices mean high quantities. Turning the relationship around, as price increases, the quantity demanded decreases. Equilibrium[ edit ] Since the demand curve slopes down and the supply curve slopes up, if they are put on the same graph, they eventually cross one another.
Diagrams for Supply and Demand | Economics Help
Graphically, this consists of superimposing the two graphs that we have; at the point where the two lines, the supply line and the demand line, meet, is called the equilibrium point for the good. In general, for any good, it is at this point that quantity supplied equals quantity demanded at a set price. If there are more buyers than there are sellers at a certain price, the price will go up until either some of the buyers decide they are not interested, or some people who were previously not considering selling decide that they want to sell their houses.
This process normally continues until there are sufficiently few buyers and sufficiently many sellers that the numbers balance out, which should happen at the equilibrium point.
- Supply and demand
- Supply, demand, and market equilibrium
The following discussions are based on that the x-axis is quantity and the y-axis is price, as the figure above. Also note, the curves need not be straight in a real situation.
Any change in non-price factors would cause a shift in the supply curve, whereas changes in the price of the commodity can be traced along a fixed supply curve.
Microeconomics/Supply and Demand
Market equilibrium It is the function of a market to equate demand and supply through the price mechanism. If buyers wish to purchase more of a good than is available at the prevailing price, they will tend to bid the price up.
If they wish to purchase less than is available at the prevailing price, suppliers will bid prices down. Thus, there is a tendency to move toward the equilibrium price. That tendency is known as the market mechanism, and the resulting balance between supply and demand is called a market equilibrium.
As the price rises, the quantity offered usually increases, and the willingness of consumers to buy a good normally declines, but those changes are not necessarily proportional. The measure of the responsiveness of supply and demand to changes in price is called the price elasticity of supply or demand, calculated as the ratio of the percentage change in quantity supplied or demanded to the percentage change in price.
Thus, if the price of a commodity decreases by 10 percent and sales of the commodity consequently increase by 20 percent, then the price elasticity of demand for that commodity is said to be 2. The demand for products that have readily available substitutes is likely to be elastic, which means that it will be more responsive to changes in the price of the product.
That is because consumers can easily replace the good with another if its price rises. Firms faced with relatively inelastic demands for their products may increase their total revenue by raising prices; those facing elastic demands cannot.