Understanding Market Dynamics: Supply and Demand

The Law of Supply

The Law of Supply illustrates the relationship between the price of a good and the quantity supplied.

The Supply Curve

The Supply Curve is an upward-sloping curve that illustrates the relationship between price and quantity supplied.

Market Supply

Market Supply refers to the sum of all individual supplies from all sellers of a good or service. Graphically, individual supply curves are added horizontally to derive the market supply curve.

Determinants of Supply

Key factors influencing supply include:

• Market Price
• Input Prices (Factors of Production)
• Technology
• Expectations
• Number of Producers

Changes in Quantity Supplied vs. Supply Changes

A change in the quantity supplied refers to a movement *along* the supply curve, resulting solely from a change in the market price of the product.

A change in supply refers to a *shift* in the entire supply curve (either to the right or left), resulting from a change in any variable *other than* the product's price.

Supply and Demand Together: Market Equilibrium

The Equilibrium Price is the price that balances supply and demand. On a graph, it is the price at which the supply and demand curves intersect.

Equilibrium Quantity

The Equilibrium Quantity is the amount that balances supply and demand. On a graph, it is the quantity at which the supply and demand curves intersect.

Shortage

A shortage occurs when the price is below the equilibrium price, causing the quantity demanded to exceed the quantity supplied. This is also known as excess demand. In such a scenario, sellers will increase the price because many buyers are willing to purchase, thus moving the market towards equilibrium.

Analyzing Changes in Market Equilibrium

Three Steps to Analyze Equilibrium Changes:

1. Determine whether the event shifts the supply curve, the demand curve, or both.
2. Determine whether the curve(s) shift(s) to the right or left.
3. Discuss how the shift affects the equilibrium price and quantity.

Curve Shifts vs. Movements Along the Curve

• A shift of the supply curve is known as a change in supply.
• A movement along the supply curve is known as a change in the quantity supplied.
• A shift of the demand curve is known as a change in demand.
• A movement along the demand curve is known as a change in quantity demanded.

Summary of Supply and Demand Principles

Economists use the model of supply and demand to analyze competitive markets.

The demand curve shows how much of a good depends on its price. According to the Law of Demand, when price rises, quantity demanded decreases. Besides price, other determinants of demand are income, tastes, expectations, and prices of complements and substitutes.

The supply curve shows how the quantity supplied depends on the price of the good. According to the Law of Supply, when the price rises, the quantity supplied increases. Besides price, other determinants of supply are input prices (factors of production), technology, and expectations.

Market equilibrium is determined by the intersection of the supply and demand curves.

Supply and demand together determine the prices of goods and services. In market economies, prices serve as a crucial guide for the distribution of resources.