| Line 40: |
Line 40: |
| | Because supply and demand can both be expressed in terms of price and quantity, they can be plotted on the same graph. In a confusing tradition by economists, '''''the y-axis is typically price, and the x-axis is usually quantity'''''. (In most other graphs the cause is placed on the x-axis and the effect is on the y-axis, but you will find that economists often seem to have things backwards!) Just memorize this rule and stick with it: price is on the y-axis, and quantity is on the x-axis. This might help you remember: "p" for price is lower in the alphabet than "q" for quantity, and "p" appears first on the graph as one reads from left to right. Put another way, the graph is of "Ps and Qs," in that order from left to right (P on the y-axis to the left, and Q on the x-axis to the right). | | Because supply and demand can both be expressed in terms of price and quantity, they can be plotted on the same graph. In a confusing tradition by economists, '''''the y-axis is typically price, and the x-axis is usually quantity'''''. (In most other graphs the cause is placed on the x-axis and the effect is on the y-axis, but you will find that economists often seem to have things backwards!) Just memorize this rule and stick with it: price is on the y-axis, and quantity is on the x-axis. This might help you remember: "p" for price is lower in the alphabet than "q" for quantity, and "p" appears first on the graph as one reads from left to right. Put another way, the graph is of "Ps and Qs," in that order from left to right (P on the y-axis to the left, and Q on the x-axis to the right). |
| | | | |
| − | The supply curve is '''''upward sloping''''': '''the higher the sales price, the higher the quantity that companies will produce for sale'''. That is because higher sales prices bring in greater revenue -- and greater profits -- to fund the costs of making the good or providing service. | + | The supply curve is always '''''upward sloping''''': '''the higher the sales price, the higher the quantity that companies will produce for sale'''. That is because higher sales prices bring in greater revenue -- and greater profits -- to provide the incentive to increase the quantity. |
| | | | |
| − | The demand curve is '''''downward sloping''''': the higher the sales price, the '''''lower''''' the quantity that people are willing to buy. Few people will buy a candy bar if it costs $5: if that price is lowered to $2, then more people will want to buy it, and if its price is lowered to $1, then even more will want to buy it, and if its price is lowered to 50 cents, then the demand by the public for that candy bar will be greater still. As the price for something goes down, the demand goes up. That results in a downward-sloping demand curve: as the price goes down the slope of the curve, the '''''quantity''''' demanded (sought) by the public goes up. | + | The demand curve is always '''''downward sloping''''': the higher the sales price, the '''''lower''''' the quantity the public is willing to buy. Few people will buy a candy bar if it costs $5: if that price is lowered to $2, then more people will want to buy it, and if its price is lowered to $1, then even more will want to buy it, and if its price is lowered to 50 cents, then the demand by the public for that candy bar will be greater still. As the price for something goes down, the demand goes up. That results in a downward-sloping demand curve: as the price goes down the slope of the curve, the '''''quantity''''' demanded (sought) by the public goes up. |
| | | | |
| − | The supply and demand is the most basic relationship in all of economics. They have independent of each other, but are placed on the same graph so that it becomes easy to find "equilibrium": the point where supply and demand have the same value for their price, and the same value for their quantity (the point of the intersection of their curves). This equilibrium is the point for the price and quantity of the good in a free market. | + | The supply and demand is the most basic relationship in all of economics. They are independent of each other, but are placed on the same graph so that it becomes easy to find "equilibrium": the point where supply and demand have the same value for their price, and the same value for their quantity (the point of the intersection of their curves). |
| | + | |
| | + | If the price is higher than the equilibrium price, then the lower demand will force sellers to lower the price until the public buys the unsold goods; if the price is lower than the equilibrium price, then the higher demand will encourage sellers to increase their price (and their profits) to sell what they have. Those market forces push the final price to the point where the supply curve intersects the demand curve, which is where the price and quantity for the supply side are equal to the price and quantity for the demand side. |
| | | | |
| | The supply and demand curves usually look like this: | | The supply and demand curves usually look like this: |
| | | | |
| | [[Image:Supply_and_demand.gif]] | | [[Image:Supply_and_demand.gif]] |
| | + | |
| | + | === Changes in Supply and Demand === |
| | | | |
| | The above model for supply and demand helps us to consider the effect of shifts in demand and supply. First consider an increase in demand: | | The above model for supply and demand helps us to consider the effect of shifts in demand and supply. First consider an increase in demand: |