Economics Online Tutor
The demand curve shows the quantity of a good or service that buyers are willing
and able to purchase at each price. It slopes downward, indicating an inverse
(negative) relationship between price and quantity demanded.
The supply curve shows the quantity of a good or service that producers are
willing and able to offer for sale at each price. It slopes upward, indicating a
positive relationship between price and quantity supplied.
The demand curve and the supply curve will intersect at only one point, where
the quantity demanded is equal to the quantity supplied. This intersection point
is called equilibrium. It represents the price and quantity that exchanges will
take place in a free market.
Equilibrium is a point where no forces exist that will cause any changes in the
market. Once the equilibrium point is reached, the market will stay at that point
unless something else changes. For supply and demand, such a change would
be a change in a determinant of supply or a determinant of demand, causing the
supply curve or the demand curve to shift.
At any price other than the equilibrium price, the quantity supplied and the
quantity demanded are not equal.
If the price is above the equilibrium price, the quantity supplied is greater than
the quantity demanded, and the result is called a surplus.
If the price is below the equilibrium price, the quantity demanded is greater than
the quantity supplied, and the result is called a shortage.
The surplus and shortage situations can be seen as resulting from the fact that
the supply curve slopes upward while the demand curve slopes downward. If the
price rises above the price where the quantity supplied is equal to the quantity
demanded, purchasers would want to purchase a lower quantity while suppliers
would want to supply a higher quantity. If the price falls below the price where
the quantity supplied is equal to the quantity demanded, purchasers would want
to purchase a higher quantity while suppliers would want to supply a lower
quantity. The law of supply and the law of demand make this true.
Surpluses and shortages represent situations of disequilibrium. Disequilibrium
is not sustainable as long as the price is free to adjust. Market forces will move
the situation back to an equilibrium condition.
If a surplus exists, suppliers will have an increase in unsold inventory. The
suppliers will lower their prices and reduce the quantity being made available for
sale in order to reduce the unsold inventory. Lower prices and decreased
production will be more profitable than unsold inventory.
If a shortage exists, producers will see that inventories are depleted and
consumer demand is not being met. Suppliers will see this unmet demand as a
source of potential profits. The suppliers will raise their prices and increase the
quantity being made available for sale in order to take advantage of the
consumer demand.
One more thing about a shortage. Many people try to equate the concept of
shortage with the concept of scarcity. Actually, in economics, these terms are
unrelated. A shortage is a situation in which the quantity demanded is greater
than the quantity supplied. Scarcity refers to the fact that human wants are
infinite while resources are limited (more would be wanted at a price of zero than
would be available).
In equilibrium, the price and quantity exchanged in a free market will not change
unless one of the determinants of supply or demand changes. But what would be
the result of such a change? Click here for a discussion of changes in
equilibrium.
and able to purchase at each price. It slopes downward, indicating an inverse
(negative) relationship between price and quantity demanded.
The supply curve shows the quantity of a good or service that producers are
willing and able to offer for sale at each price. It slopes upward, indicating a
positive relationship between price and quantity supplied.
The demand curve and the supply curve will intersect at only one point, where
the quantity demanded is equal to the quantity supplied. This intersection point
is called equilibrium. It represents the price and quantity that exchanges will
take place in a free market.
Equilibrium is a point where no forces exist that will cause any changes in the
market. Once the equilibrium point is reached, the market will stay at that point
unless something else changes. For supply and demand, such a change would
be a change in a determinant of supply or a determinant of demand, causing the
supply curve or the demand curve to shift.
At any price other than the equilibrium price, the quantity supplied and the
quantity demanded are not equal.
If the price is above the equilibrium price, the quantity supplied is greater than
the quantity demanded, and the result is called a surplus.
If the price is below the equilibrium price, the quantity demanded is greater than
the quantity supplied, and the result is called a shortage.
The surplus and shortage situations can be seen as resulting from the fact that
the supply curve slopes upward while the demand curve slopes downward. If the
price rises above the price where the quantity supplied is equal to the quantity
demanded, purchasers would want to purchase a lower quantity while suppliers
would want to supply a higher quantity. If the price falls below the price where
the quantity supplied is equal to the quantity demanded, purchasers would want
to purchase a higher quantity while suppliers would want to supply a lower
quantity. The law of supply and the law of demand make this true.
Surpluses and shortages represent situations of disequilibrium. Disequilibrium
is not sustainable as long as the price is free to adjust. Market forces will move
the situation back to an equilibrium condition.
If a surplus exists, suppliers will have an increase in unsold inventory. The
suppliers will lower their prices and reduce the quantity being made available for
sale in order to reduce the unsold inventory. Lower prices and decreased
production will be more profitable than unsold inventory.
If a shortage exists, producers will see that inventories are depleted and
consumer demand is not being met. Suppliers will see this unmet demand as a
source of potential profits. The suppliers will raise their prices and increase the
quantity being made available for sale in order to take advantage of the
consumer demand.
One more thing about a shortage. Many people try to equate the concept of
shortage with the concept of scarcity. Actually, in economics, these terms are
unrelated. A shortage is a situation in which the quantity demanded is greater
than the quantity supplied. Scarcity refers to the fact that human wants are
infinite while resources are limited (more would be wanted at a price of zero than
would be available).
In equilibrium, the price and quantity exchanged in a free market will not change
unless one of the determinants of supply or demand changes. But what would be
the result of such a change? Click here for a discussion of changes in
equilibrium.
| RETURN TO SUPPLY & DEMAND MAIN PAGE DEMAND DEMAND ANALYSIS: UTILITY DEMAND ANALYSIS: INDIFFERENCE CURVES SUPPLY CHANGES IN EQUILIBRIUM SUPPLY & DEMAND IN THE FACTOR MARKETS |
Supply and Demand Equilibrium |
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| Looking for graphs on this page? Please refer to the page in this site called "Using Graphs in Economics" for an explanation of how this site handles the issue of graphs. |
| This page, along with additional commentary, was posted on the "Economics Online Tutor" Facebook page's timeline on July 20, 2012. |