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1. In microeconomics, 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 for price and quantity.
The four basic laws of supply and demand are:[1]
1.If demand increases and supply remains unchanged, a shortage
occurs, leading to a higher equilibrium price.
2.If demand decreases and supply remains unchanged, a surplus
occurs, leading to a lower equilibrium price.
3.If demand remains unchanged and supply increases, a surplus
occurs, leading to a lower equilibrium price.
4.If demand remains unchanged and supply decreases, a shortage
occurs, leading to a higher equilibrium price.
Contents [hide]
1 Graphical representation of
supply and demand
1.1 Supply schedule
1.2 Demand schedule
2 Microeconomics
2.1 Equilibrium
2.2 Partial equilibrium
3 Other markets
4 Empirical estimation
5 Macroeconomic uses of demand
and supply
6 History
7 Criticisms
8 See also
9 References
10 External links
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Graphical representation of supply and demand
Although it is normal to regard the quantity demanded and the

2. quantity supplied as functions of the price of the good, the standard
graphical representation, usually attributed to Alfred Marshall, has price
on the vertical axis and quantity on the horizontal axis, the opposite of
the standard convention for the representation of a mathematical
function.
Since determinants of supply and demand other than the price of the
good in question are not explicitly represented in the supply-demand
diagram, changes in the values of these variables are represented by
moving the supply and demand curves (often described as "shifts" in
the curves). By contrast, responses to changes in the price of the good
are represented as movements along unchanged supply and demand
curves.
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Supply schedule
A supply schedule is a table that shows the relationship between the
price of a good and the quantity supplied. A supply curve is a graph that
illustrates that relationship between the price of a good and the quantity
supplied .
Under the assumption of perfect competition, supply is determined by
marginal cost. Firms will produce additional output while the cost of
producing an extra unit of output is less than the price they would
receive.
By its very nature, conceptualizing a supply curve requires the firm to be
a perfect competitor, namely requires the firm to have no influence over
the market price. This is true because each point on the supply curve is
the answer to the question "If this firm is faced with this potential price,
how much output will it be able to and willing to sell?" If a firm has
market power, its decision of how much output to provide to the market
influences the market price, then the firm is not "faced with" any price,
and the question is meaningless.
Economists distinguish between the supply curve of an individual firm
and between the market supply curve. The market supply curve is
obtained by summing the quantities supplied by all suppliers at each
potential price. Thus, in the graph of the supply curve, individual firms'

3. supply curves are added horizontally to obtain the market supply curve.
Economists also distinguish the short-run market supply curve from the
long-run market supply curve. 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), and the number of firms in the
industry. In the long run, firms have a chance to adjust their holdings of
physical capital, enabling them to better adjust their quantity supplied at
any given price. Furthermore, in the long run potential competitors can
enter or exit the industry in response to market conditions. For both of
these reasons, long-run market supply curves are flatter than their
short-run counterparts.
The determinants of supply are:
1.Production costs, how much a good costs to be produced
2.The technology used in production, and/or technological advances
3.Firms' expectations about future prices
4.Number of suppliers
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Demand schedule
A demand schedule, depicted graphically as the demand curve,
represents the amount of some good that buyers are willing and able to
purchase at various prices, assuming all determinants of demand other
than the price of the good in question, such as income, tastes and
preferences, the price of substitute goods, and the price of
complementary goods, remain the same. Following the law of demand,
the demand curve is almost always represented as downward-sloping,
meaning that as price decreases, consumers will buy more of the
good.[2]
Just like the supply curves reflect marginal cost curves, demand curves
are determined by marginal utility curves.[3] Consumers will be willing to
buy a given quantity of a good, at a given price, if the marginal utility of
additional consumption is equal to the opportunity cost determined by
the price, that is, the marginal utility of alternative consumption choices.
The demand schedule is defined as the willingness and ability of a
consumer to purchase a given product in a given frame of time.

4. It is aforementioned, that the demand curve is generally downward-
sloping, there may be rare examples of goods that have upward-sloping
demand 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).
By its very nature, conceptualizing a demand curve requires that the
purchaser be a perfect competitor—that is, that the purchaser has no
influence over the market price. This is true because each point on the
demand curve is the answer to the question "If this buyer is faced with
this potential price, how much of the product will it purchase?" If a buyer
has market power, so its decision of how much to buy influences the
market price, then the buyer is not "faced with" any price, and the
question is meaningless.
Like with supply curves, economists distinguish between the demand
curve of an individual and the market demand curve. The market
demand curve is obtained by summing the quantities demanded by all
consumers at each potential price. Thus, in the graph of the demand
curve, individuals' demand curves are added horizontally to obtain the
market demand curve.
The determinants of demand are:
1.Income
2.Tastes and preferences
3.Prices of related goods and services
4.Consumers' expectations about future prices and incomes that can be
checked
5.Number of potential consumers
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Microeconomics
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Equilibrium
Equilibrium is defined to be the price-quantity pair where the quantity
demanded is equal to the quantity supplied, represented by the
intersection of the demand and supply curves.

5. Market Equilibrium: A situation in a market when the price is such that
the quantity that consumers demand is correctly balanced by the
quantity that firms wish to supply.
Comparative static analysis: Examines the likely effect on the
equilibrium of a change in the external conditions affecting the market.
Changes in market equilibrium: Practical uses of supply and demand
analysis often center on the different variables that change equilibrium
price and quantity, represented as shifts in the respective curves.
Comparative statics of such a shift traces the effects from the initial
equilibrium to the new equilibrium.
Demand curve shifts:
Main article: Demand curve
When consumers increase the quantity demanded at a given price, it is
referred to as an increase in demand. Increased demand can be
represented on the graph as the curve being shifted to the right. At each
price point, a greater quantity is demanded, as from the initial curve D1
to the new curve D2. In the diagram, this raises the equilibrium price
from P1 to the higher P2. This raises the equilibrium quantity from Q1 to
the higher Q2. A movement along the curve is described as a "change
in the quantity demanded" to distinguish it from a "change in demand,"
that is, a shift of the curve. there has been an increase in demand which
has caused an increase in (equilibrium) quantity. The increase in
demand could also come from changing tastes and fashions, incomes,
price changes in complementary and substitute goods, market
expectations, and number of buyers. This would cause the entire
demand curve to shift changing the equilibrium price and quantity. Note
in the diagram that the shift of the demand curve, by causing a new
equilibrium price to emerge, resulted in movement along the supply
curve from the point (Q1, P1) to the point Q2, P2).
If the demand decreases, then the opposite happens: a shift of the
curve to the left. If the demand starts at D2, and decreases to D1, the
equilibrium price will decrease, and the equilibrium quantity will also
decrease. The quantity supplied at each price is the same as before the
demand shift, reflecting the fact that the supply curve has not shifted;
but the equilibrium quantity and price are different as a result of the

6. change (shift) in demand.
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 x-intercept,
the constant term of the demand equation.
Supply curve shifts:
Main article: Supply (economics)
When technological progress occurs, the supply curve shifts. For
example, assume that someone invents a better way of growing wheat
so that the cost of growing a given quantity of wheat decreases.
Otherwise stated, producers will be willing to supply more wheat at
every price and this shifts the supply curve S1 outward, to S2—an
increase in supply. This increase in supply causes the equilibrium price
to decrease from P1 to P2. The equilibrium quantity increases from Q1
to Q2 as consumers move along the demand curve to the new lower
price. As a result of a supply curve shift, the price and the quantity move
in opposite directions.
If the quantity supplied decreases, the opposite happens. If the supply
curve starts at S2, and shifts leftward to S1, 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. The quantity demanded at each price is the same
as before the supply shift, reflecting the fact that the demand curve has
not shifted. But due to the change (shift) in supply, the equilibrium
quantity and price have changed.
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, the
constant term of the supply equation. The supply curve shifts up and
down the y axis as non-price determinants of demand change.

7. Economics Basics: Supply and Demand
Filed Under » Alfred Marshall, Macroeconomics,
Microeconomics, Monetary Policy
Supply and demand is perhaps one of the most fundamental
concepts of economics and it is the backbone of a market
economy. Demand refers to how much (quantity) of a product
or service is desired by buyers. The quantity demanded is the
amount of a product people are willing to buy at a certain
price; the relationship between price and quantity demanded
is known as the demand relationship. Supply represents how
much the market can offer. The quantity supplied refers to the
amount of a certain good producers are willing to supply when
receiving a certain price. The correlation between price and
how much of a good or service is supplied to the market is
known as the supply relationship. Price, therefore, is a
reflection of supply and demand.
The relationship between demand and supply underlie the
forces behind the allocation of resources. In market economy
theories, demand and supply theory will allocate resources in
the most efficient way possible. How? Let us take a closer look
at the law of demand and the law of supply.
A. The Law of Demand
The law of demand states that, if all other factors remain
equal, the higher the price of a good, the less people will
demand that good. In other words, the higher the price, the
lower the quantity demanded. The amount of a good that
buyers purchase at a higher price is less because as the price
of a good goes up, so does the opportunity cost of buying that
good. As a result, people will naturally avoid buying a product
that will force them to forgo the consumption of something
else they value more. The chart below shows that the curve is
a downward slope.

8. A, B and C are points on the demand curve. Each point on the
curve reflects a direct correlation between quantity demanded
(Q) and price (P). So, at point A, the quantity demanded will
be Q1 and the price will be P1, and so on. The demand
relationship curve illustrates the negative relationship between
price and quantity demanded. The higher the price of a good
the lower the quantity demanded (A), and the lower the price,
the more the good will be in demand (C).
B. The Law of Supply
Like the law of demand, the law of supply demonstrates the
quantities that will be sold at a certain price. But unlike the
law of demand, the supply relationship shows an upward
slope. This means that the higher the price, the higher the
quantity supplied. Producers supply more at a higher price
because selling a higher quantity at a higher price increases
revenue.

9. A, B and C are points on the supply curve. Each point on the
curve reflects a direct correlation between quantity supplied
(Q) and price (P). At point B, the quantity supplied will be Q2
and the price will be P2, and so on. (To learn how economic
factors are used in currency trading, read Forex Walkthrough:
Economics.)
Time and Supply
Unlike the demand relationship, however, the supply
relationship is a factor of time. Time is important to supply
because suppliers must, but cannot always, react quickly to a
change in demand or price. So it is important to try and
determine whether a price change that is caused by demand
will be temporary or permanent.
Let's say there's a sudden increase in the demand and price
for umbrellas in an unexpected rainy season; suppliers may
simply accommodate demand by using their production
equipment more intensively. If, however, there is a climate
change, and the population will need umbrellas year-round,
the change in demand and price will be expected to be long
term; suppliers will have to change their equipment and

10. production facilities in order to meet the long-term levels of
demand.
C. Supply and Demand Relationship
Now that we know the laws of supply and demand, let's turn
to an example to show how supply and demand affect price.
Imagine that a special edition CD of your favorite band is
released for $20. Because the record company's previous
analysis showed that consumers will not demand CDs at a
price higher than $20, only ten CDs were released because the
opportunity cost is too high for suppliers to produce more. If,
however, the ten CDs are demanded by 20 people, the price
will subsequently rise because, according to the demand
relationship, as demand increases, so does the price.
Consequently, the rise in price should prompt more CDs to be
supplied as the supply relationship shows that the higher the
price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at
20, the price will not be pushed up because the supply more
than accommodates demand. In fact after the 20 consumers
have been satisfied with their CD purchases, the price of the
leftover CDs may drop as CD producers attempt to sell the
remaining ten CDs. The lower price will then make the CD
more available to people who had previously decided that the
opportunity cost of buying the CD at $20 was too high.
D. Equilibrium
When supply and demand are equal (i.e. when the supply
function and demand function intersect) the economy is said
to be at equilibrium. At this point, the allocation of goods is at
its most efficient because the amount of goods being supplied
is exactly the same as the amount of goods being demanded.
Thus, everyone (individuals, firms, or countries) is satisfied
with the current economic condition. At the given price,

11. suppliers are selling all the goods that they have produced and
consumers are getting all the goods that they are demanding.
As you can see on the chart, equilibrium occurs at the
intersection of the demand and supply curve, which indicates
no allocative inefficiency. At this point, the price of the goods
will be P* and the quantity will be Q*. These figures are
referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached
in theory, so the prices of goods and services are constantly
changing in relation to fluctuations in demand and supply.
E. Disequilibrium
Disequilibrium occurs whenever the price or quantity is not
equal to P* or Q*.
1. Excess Supply
If the price is set too high, excess supply will be created within
the economy and there will be allocative inefficiency.

12. At price P1 the quantity of goods that the producers wish to
supply is indicated by Q2. At P1, however, the quantity that
the consumers want to consume is at Q1, a quantity much less
than Q2. Because Q2 is greater than Q1, too much is being
produced and too little is being consumed. The suppliers are
trying to produce more goods, which they hope to sell to
increase profits, but those consuming the goods will find the
product less attractive and purchase less because the price is
too high.
2. Excess Demand
Excess demand is created when price is set below the
equilibrium price. Because the price is so low, too many
consumers want the good while producers are not making
enough of it.
In this situation, at price P1, the quantity of goods demanded
by consumers at this price is Q2. Conversely, the quantity of
goods that producers are willing to produce at this price is Q1.
Thus, there are too few goods being produced to satisfy the
wants (demand) of the consumers. However, as consumers
have to compete with one other to buy the good at this price,
the demand will push the price up, making suppliers want to
supply more and bringing the price closer to its equilibrium.
F. Shifts vs. Movement
For economics, the "movements" and "shifts" in relation to the

13. supply and demand curves represent very different market
phenomena:
1. Movements
A movement refers to a change along a curve. On the demand
curve, a movement denotes a change in both price and
quantity demanded from one point to another on the curve.
The movement implies that the demand relationship remains
consistent. Therefore, a movement along the demand curve
will occur when the price of the good changes and the quantity
demanded changes in accordance to the original demand
relationship. In other words, a movement occurs when a
change in the quantity demanded is caused only by a change
in price, and vice versa.
Like a movement along the demand curve, a movement along
the supply curve means that the supply relationship remains
consistent. Therefore, a movement along the supply curve will
occur when the price of the good changes and the quantity
supplied changes in accordance to the original supply
relationship. In other words, a movement occurs when a
change in quantity supplied is caused only by a change in
price, and vice versa.

14. 2. Shifts
A shift in a demand or supply curve occurs when a good's
quantity demanded or supplied changes even though price
remains the same. For instance, if the price for a bottle of beer
was $2 and the quantity of beer demanded increased from Q1
to Q2, then there would be a shift in the demand for beer.
Shifts in the demand curve imply that the original demand
relationship has changed, meaning that quantity demand is
affected by a factor other than price. A shift in the demand
relationship would occur if, for instance, beer suddenly became
the only type of alcohol available for consumption.
Conversely, if the price for a bottle of beer was $2 and the
quantity supplied decreased from Q1 to Q2, then there would
be a shift in the supply of beer. Like a shift in the demand
curve, a shift in the supply curve implies that the original
supply curve has changed, meaning that the quantity supplied
is effected by a factor other than price. A shift in the supply
curve would occur if, for instance, a natural disaster caused a

15. mass shortage of hops; beer manufacturers would be forced to
supply less beer for the same price.