Changes

No company can afford to build cars (supply them) if the sales price is only $1.  But at a sales price of $30,000, a vast number of cars can be built.  '''The cause is price, and the effect is quantity''': the higher the market price for something, the more that manufacturers will want to make and sell it.

No company can afford to build cars (supply them) if the sales price is only $1.  But at a sales price of $30,000, a vast number of cars can be built.  '''The cause is price, and the effect is quantity''': the higher the market price for something, the more that manufacturers will want to make and sell it.

[[File:Red Lamborghini.png|200px|thumb|right|Impress the girls with this Lamborghini sports car, at a cost of $350,000.  Not much demand at that high price!]]

[[File:Red Lamborghini.png|200px|thumb|right|Impress the girls with this Lamborghini sports car, at a cost of $350,000.  Not a high demand at that price!]]

The demand for a good is also described in terms of price and quantity.  At a given price, there is a specific quantity demanded by the public for the good.  A billion people might buy a car if the price were only $1 (unrealistic).  At a much higher price of $30,000, the demand drops to a quantity of millions sold (realistic).  At a still higher price of more than $100,000, the demand falls much further to the range of only a few thousand that can be sold (these are the very luxurious cars, like the Lamborghini sports car shown at the right).

The demand for a good is also described in terms of price and quantity.  At a given price, there is a specific quantity demanded by the public for the good.  A billion people might buy a car if the price were only $1 (unrealistic).  At a much higher price of $30,000, the demand drops to a quantity of millions sold (realistic).  At a still higher price of more than $100,000, the demand falls much further to the range of only a few thousand that can be sold (these are the very luxurious cars, like the Lamborghini sports car shown at the right).

[[Image:Supply_and_demand.gif]]

[[Image:Supply_and_demand.gif]]

In the graph above, P^* and Q^* are the price and quantity at which the good is sold, or the equilibrium price and quantity.

In the graph above, P^* and Q^* are the price and quantity at which the good is sold: the equilibrium price and quantity.

The point where supply equals demand can be found either by graphing the two curves and seeing the point of intersection or, if you have the equation for each curve, by solving the equations algebraically.  For example, if the supply curve is P = 100 + Q and the demand curve is P = 500 - Q, then the point of intersection can be found by solving these two equations: when the P in the first equation equals the P in the second equation, then 100 + Q = 500 - Q, thus 2Q = 400, and thus Q = 200.  From there you can solve for P by plugging Q back into one of the two original equations:  

The point where supply equals demand can be found either by graphing the two curves and seeing the point of intersection or, if you have the equation for each curve, by solving the equations algebraically.  For example, if the supply curve is P = 100 + Q and the demand curve is P = 500 - Q, then the point of intersection can be found by solving these two simultaneous equations as follows. When the P in the first equation equals the P in the second equation, then 100 + Q = 500 - Q, thus 2Q = 400, and thus Q = 200.  From there you can solve for P by plugging Q back into one of the two original equations: P = 500 - 200 = 300.  You can check this answer by plugging Q into the other original equation to confirm that you get the same P = 100 + 200 = 300.  So the final answer -- the point where supply equals demand -- is this: P=300, Q=200.

<br>P = 500 - 200 = 300.  You can check this answer by plugging Q into the other original equation to confirm that you get the same P = 100 + 200 = 300.  So the final answer -- the point where supply equals demand -- is P=300, Q=200.

=== Changes in Supply and Demand ===

=== Changes in Supply and Demand ===

The above model for supply and demand helps us to consider the effect of changes or shifts in supply and demand.  First consider an increase in demand by the public for a particular good, from demand curve 1 (D₁) to demand curve 2 (D₂):

The above model for supply and demand helps us consider the effect of changes or shifts in supply and demand.  First consider an increase in demand by the public for a particular good, from demand curve 1 (D₁) to demand curve 2 (D₂):

[[Image:Demand_curve_shift.gif]]

[[Image:Demand_curve_shift.gif]]

Can you interpret that?  When the supply curve shifted to the right as supply increased, the price decreased but the quantity increased.  The new equilibrium is at a lower price and greater quantity than before.  Consumers are happier as supply increases.  The discovery of new oil reserves, or inventions like the cotton gin, make consumers (the public) better off.

Can you interpret that?  When the supply curve shifted to the right as supply increased, the price decreased but the quantity increased.  The new equilibrium is at a lower price and greater quantity than before.  Consumers are happier as supply increases.  The discovery of new oil reserves, or inventions like the cotton gin, make consumers (the public) better off.

== The "Free Market" ==

== The "Free Market" ==