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The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity. The four basic laws of supply and demand are  1. If demand increases and supply remains unchanged then higher equilibrium price and quantity. 2. If demand decreases and supply remains unchanged then lower equilibrium price and quantity. 3. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity. 4. If supply decreases and demand remains unchanged then higher price and lower quantity.
Determinants of supply and demand other than the price of the good in question.1 Supply schedule o 1. Changes in the values of these variables are represented by shifts in the supply and demand curves. the standard graphical representation. usually attributed to Alfred Marshall.2 Demand schedule 2 Microeconomics o 2.1 Equilibrium 3 Changes in market equilibrium o 3. such as consumers' income. assuming ceteris paribus. responses to changes in the price of the good are represented as movements along unchanged supply and demand curves. that is.2 Supply curve shifts 4 Elasticity o 4. Although it is normal to regard the quantity demanded and the quantity supplied as functions of the price of the good.[hide] • • • • • • • • • • • • 1 The graphical representation of supply and demand o 1. . has price on the vertical axis and quantity on the horizontal axis.1 Demand curve shifts o 3.  Supply schedule The supply schedule. depicted graphically as the supply curve.1 Economies of scale: Mass production 10 See also 11 References 12 External links  The graphical representation of supply and demand The supply-demand model is a partial equilibrium model representing the determination of the price of a particular good and the quantity of that good which is traded. By contrast. input prices and so on. are not explicitly represented in the supplydemand diagram. represents the amount of some good that producers are willing and able to sell at various prices. the opposite of the standard convention for the representation of a mathematical function.1 Vertical supply curve (perfectly inelastic supply) 5 Other markets 6 Empirical estimation 7 Macroeconomic uses of demand and supply 8 History 9 Criticism o 9.
and the number of firms in the industry. Economists distinguish between the supply curve of an individual firm and the market supply curve. that the firm has no influence over the market price. and the question is meaningless. This is because each point on the supply curve is the answer to the question "If this firm is faced with this potential price. in the long run potential competitors can enter or exit the industry in response to market conditions. By its very nature. In this context. two things are assumed constant by definition of the short run: the availability of one or more fixed inputs (typically physical capital). In the long run. such as technology and the prices of factors of production. conceptualizing a supply curve requires that the firm be a perfect competitor—that is. Furthermore. Economists also distinguish the short-run market supply curve from the long-run market supply curve. then the firm is not "faced with" any price.assuming all determinants of supply other than the price of the good in question. how much output will it be able to and willing to sell?" If a firm has market power. so its decision of how much output to provide to the market influences the market price. remain the same. Under the assumption of perfect competition. enabling them to better adjust their quantity supplied at any given price. For both of these . firms have a chance to adjust their holdings of physical capital. Firms will produce additional output as long as the cost of producing an extra unit of output is less than the price they will receive. Thus in the graph of the supply curve. individual firms' supply curves are added horizontally to obtain the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. supply is determined by marginal cost.
3. the demand curve is almost always represented as downward-sloping. economists distinguish between the demand curve of an individual and the market demand curve. 2. By its very nature. conceptualizing a demand curve requires that the purchaser be a perfect competitor—that is. remain the same. such as income. Production costs The technology of production The price of related goods Firm's expectations about future prices Number of suppliers  Demand schedule The demand schedule. As with supply curves. and the question is meaningless. then the buyer is not "faced with" any price. The demand schedule is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time. if the marginal utility of additional consumption is equal to the opportunity cost determined by the price. that is. Following the law of demand. Just as the supply curves reflect marginal cost curves. demand curves are determined by marginal utility curves. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods made more fashionable by a higher price). so its decision of how much to buy influences the market price. Consumers will be willing to buy a given quantity of a good. consumers will buy more of the good. depicted graphically as the demand curve. The determinants of supply follow: 1. the marginal utility of alternative consumption choices. how much of the product will it purchase?" If a buyer has market power. This is because each point on the demand curve is the answer to the question "If this buyer is faced with this potential price. 5. the price of substitute goods.reasons. tastes and preferences. There may be rare examples of goods that have upward-sloping demand curves. meaning that as price decreases. The market demand curve is obtained by summing the quantities demanded by all consumers at each potential price. assuming all determinants of demand other than the price of the good in question. at a given price. the demand curve is generally downward-sloping. Thus in the . that the purchaser has no influence over the market price. and the price of complementary goods. 4. represents the amount of some good that buyers are willing and able to purchase at various prices. long-run market supply curves are flatter than their shortrun counterparts. As described above.
represented as shifts in the respective curves. The determinants of demand follow: 1. Market Equilibrium: A situation in a market when the price is such that the quantity that consumers wish to demand is correctly balanced by the quantity that firms wish to supply. Number of Buyers  Microeconomics  Equilibrium Equilibrium is defined to the price-quantity pair where the quantity demanded is equal to the quantity supplied. Prices of related goods and services 4.  Changes in market equilibrium Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity. individuals' demand curves are added horizontally to obtain the market demand curve. Comparative statics . Comparative static analysis: Examines the likely effect on the equilibrium of a change in the external conditions affecting the market. represented by the intersection of the demand and supply curves. Tastes and preferences 3. Income 2. Expectations 5.graph of the demand curve.
At each price point. market expectations. In the diagram. A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand. as from the initial curve D1 to the new curve D2." that is. a greater quantity is demanded. In the example above.of such a shift traces the effects from the initial equilibrium to the new equilibrium. Increased demand can be represented on the graph as the curve being shifted to the right. This would cause the entire demand curve to shift changing the equilibrium price and quantity. this raises the equilibrium price from P1 to the higher P2.  Demand curve shifts Main article: Demand curve An outward (rightward) shift in demand increases both equilibrium price and quantity When consumers increase the quantity demanded at a given price. resulted in . it is referred to as an increase in demand. This raises the equilibrium quantity from Q1 to the higher Q2. Note in the diagram that the shift of the demand curve. by causing a new equilibrium price to emerge. incomes. price changes in complementary and substitute goods. a shift of the curve. The increase in demand could also come from changing tastes and fashions. and number of buyers. there has been an increase in demand which has caused an increase in (equilibrium) quantity.
reflecting the fact that the supply curve has not shifted. and the equilibrium quantity will also decrease. the equilibrium price will decrease. to S2—an increase in supply. P1) to the point Q2. This increase in supply causes the equilibrium price to decrease from P1 to P2. The movement of the demand curve in response to a change in a non-price determinant of demand is caused by a change in the xintercept. For example.  Supply curve shifts Main article: Supply (economics) An outward (rightward) shift in supply reduces the equilibrium price but increases the equilibrium quantity When the suppliers' unit input costs change. but the equilibrium quantity and price are different as a result of the change (shift) in demand. the constant term of the demand equation. The equilibrium quantity increases from Q1 to Q2 . and decreases to D1. producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward. If the demand starts at D2. The quantity supplied at each price is the same as before the demand shift. or when technological progress occurs. then the opposite happens: a shift of the curve to the left. P2). the supply curve shifts.movement along the supply curve from the point (Q1. Otherwise stated. assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases. If the demand decreases.
Often. the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. how will this affect the amount of their good that .as consumers move along the demand curve to the new lower price. which calculates the elasticity over a range of values. The quantity demanded at each price is the same as before the supply shift. it is useful to know how strongly the quantity demanded or supplied will change when the price changes. point elasticity uses differential calculus to determine the elasticity at a specific point. In this context.  Elasticity Main article: Elasticity (economics) Elasticity is a central concept in the theory of supply and demand. the price and the quantity move in opposite directions. In contrast. the equilibrium quantity and price have changed. reflecting the fact that the demand curve has not shifted. the opposite happens. including price and other determinants. If the quantity supplied decreases. If the supply curve starts at S2. If a monopolist decides to increase the price of its product. For discrete changes this is known as arc elasticity. respectively. But due to the change (shift) in supply. Elasticity is a measure of relative changes. This is known as the price elasticity of demand or the price elasticity of supply. The supply curve shifts up and down the y axis as non-price determinants of demand change. As a result of a supply curve shift. The movement of the supply curve in response to a change in a non-price determinant of supply is caused by a change in the y-intercept. One way to define elasticity is the percentage change in one variable (the quantity supplied or demanded) divided by the percentage change in the causative variable. the constant term of the supply equation. elasticity refers to how strongly the quantities supplied and demanded respond to various factors. and shifts leftward to S1.
Elasticity in relation to variables other than price can also be considered. then demand or supply is said to be elastic.that is. and because in the long run new firms can enter or old firms can exit the market. the quantity of pens increased by 2%. How strongly would the demand for a good change if income increased or decreased? The relative percentage change is known as the income elasticity of demand. because in the long run firms can respond to market conditions by varying their holdings of physical capital. Since the changes are in percentages. has zero elasticity. knowledge of the price elasticity will help us to predict the size of the resulting effect on the quantity demanded. and the price increased by 5%. if the price moves from $1. If supply is perfectly inelastic. If the quantity changes by a lesser percentage than the price did. changing the unit of measurement or the currency will not affect the elasticity. Likewise. and as a result the quantity supplied goes from 100 pens to 102 pens.4. Short-run supply curves are not as elastic as long-run supply curves. then there is a vertical supply curve.customers purchase? This knowledge helps the firm determine whether the increased unit price will offset the decrease in sales volume. thereby increasing the effective price. If the quantity demanded or supplied changes by a greater percentage than the price did. For example. One of the most common to consider is income. if a government imposes a tax on a good. . so the price elasticity of supply is 2%/5% or 0. Elasticity is calculated as the percentage change in quantity divided by the associated percentage change in price.05. demand or supply is said to be inelastic.00 to $1.
the cross elasticity of demand would be -2. In real economic systems.Another elasticity sometimes considered is the cross elasticity of demand. Substitute goods are those where one can be substituted for the other. usually the other is also. one may purchase less of it and instead purchase its substitute.  Vertical supply curve (perfectly inelastic supply) . information. markets don't always behave in this way. where if one is consumed. in response to a 10% increase in the price of fuel. or at least imperfect. This is often considered when looking at the relative changes in demand when studying complements and substitute goods.0. and markets take some time before they reach a new equilibrium position. which measures the responsiveness of the quantity demanded of a good to a change in the price of another good. Ultimately both producers and consumers must rely on trial and error as well as prediction and calculation to find the true equilibrium of a market. Complements are goods that are typically utilized together. the quantity of new cars demanded decreased by 20%. and if the price of one good rises. Any change in market conditions would cause a jump from one equilibrium position to another at once. if. the price and quantity in any market would be able to move to a new equilibrium position instantly. For an example with a complement good. where no one economic agent could ever be expected to know every relevant condition in every market. without spending any time away from equilibrium. Cross elasticity of demand is measured as the percentage change in demand for the first good divided by the causative percentage change in the price of the other good. This is due to asymmetric. In a frictionless economy.
The equilibrium quantity is always Q. that the policy of increased labor market flexibility. Robert L.When demand D1 is in effect. the price will be P2. that little of the empirical work done with the textbook model constitutes a potentially falsifying test. The money supply may be a . Vienneau. the money market is analyzed as a supplyand-demand system with interest rates being the price. including the reduction of minimum wages. who try to sell their labor for the highest price. In both classical and Keynesian economics. consequently. The model is commonly applied to wages.  Other markets The model of supply and demand also applies to various specialty markets. A number of economists (for example Pierangelo Garegnani. The suppliers are individuals. in the market for labor. When D2 is occurring. The demanders of labor are businesses. empirical evidence hardly exists for that model. building on the work of Piero Sraffa. does not have an "intellectually coherent" argument in economic theory. the price will be P1. particularly to all markets for factors of production. This criticism of the application of the model of supply and demand generalizes. argue that that this model of the labor market. If the quantity supplied is fixed in the very short run no matter what the price. and supply is called perfectly inelastic. partially on the basis of Sraffianism. based on simulation results. The typical roles of supplier and demander are reversed. the supply curve is a vertical line. The equilibrium price for a certain type of labor is the wage rate. Graham White  argues. and. and any shifts in demand will only affect price. It also has implications for monetary theory not drawn out here. is logically incoherent. even given all its assumptions. and Arrigo Opocher & Ian Steedman). which try to buy the type of labor they need at the lowest price. Michael Anyadike-Danes and Wyne Godley  argue.
vertical supply curve. The demand for money intersects with the money supply to determine the interest rate.  Empirical estimation . On the other hand. if the central bank of a country chooses to use monetary policy to fix its value regardless of the interest rate. in this case the money supply is totally inelastic. the money supply curve is a horizontal line if the central bank is targeting a fixed interest rate and ignoring the value of the money supply. in this case the money supply curve is perfectly elastic.
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