25 Theories to Get You Started Supply and Demand

Supply and Demand

C onsider a good that is being sold in many places across a nation. From the perspective of a consumer, generally a higher price will mean fewer units of the good are sold. Generally, a lower price will mean that more units of the good are sold. From the perspective of a producer however, the higher the price is, the more they will want to produce of the good. Again, the opposite is generally true as well; the lower the price, the less they will want to produce the good.

This can be represented by a graph, called a supply and demand curve. Here is an example of a supply and demand curve from the Wikimedia commons.

Price is indicated on the vertical axis, denoted as “P”. Quantity is on the horizontal axis, denoted as “Q”. The S curve is an example of a supply curve, and the D1 and D2 curves are examples of two slightly different demand curves.

When looking at the supply curve, we can see that an increase in price will create additional supply (the quantity goes up), while an increase in price stimulates a decrease in the amount demanded (the D curve). The point where the supply and demand curves cross corresponds to a point known as equilibrium.

This is the point where producers and consumers exchange goods at a cost and quantity that represents a balance between the consumer’s wish to pay less money and the producer’s wish to make more money. Equilibrium is the point where everybody willing to pay the market price has their demand satified, and anybody willing to produce at the market price has a buyer for the good. At any other point along either curve the market forces would drive supply and demand toward equilibrium. For instance, at a lower price, demand would outstrip supply. Unsatisfied consumers could offer to pay more to receive goods, and the increased price is an incentive for a profit seeking producer to produce more goods, causing supply to increase. In general, market forces will cause the market to move towards the equilibrium point.