THE FEDERAL RESERVE BANK OF ATLANTA

Supply & Demand

How d o ma rke ts de te rmine price s ?
MICROECONOMICS

Law of Supply Law of Demand

There is a direct, or positive, relationship between the There is an inverse or negative relationship
price of a good or service and the quantity supplied between the price of a good or service and the
of that good or service. quantity demanded of that good or service.

Price = P Qs = Quantity supplied Price = P Qd = Quantity demanded

Chocolate Bar Supply Curve Chocolate Bar Demand Curve

If P from $2.00 to $1.60 If P from $2.00 to $1.60

Then Qs from 500 to Then Qd from 100 to
400 bars 200 bars.
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Price

Price

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an
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$1.60 $1.60

0 400 500 0 100 200

Quantity Quantity

Determinants of Supply Determinants of Demand

∆ Input prices ∆ Technology ∆ Income ∆ Prices of related goods

$
$ $
$

∆ Number of sellers ∆ Producer ∆ Number of buyers ∆ Consumer

expectations expectations

∆=Change ∆=Change

Shifting the Supply Curve Shifting the Demand Curve

∆ Cost for factors of production ∆ Price of complementary goods

P of cocoa and sugar P for graham crackers and marshmallows

Supply and shifts left Demand and shifts right

from D1 to D2
from S1 to S2
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2

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Price
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0 0
Quantity Quantity

Market Equilibrium

When a market is in equilibrium, the quantity demanded equals the quantity

supplied at the price that clears the market. This is the equilibrium price.

Ep = Equilibrium price Eq = Equilibrium quantity

Price

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Eq Quantity

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