Changes

Because supply and demand can both be expressed in terms of price and quantity, they can be plotted on the same graph.  '''''The y-axis is typically price, and the x-axis is usually quantity'''''.  Just memorize this rule and stick with it:  price is on the y-axis, and quantity is on the x-axis.<ref>You might think it would be more natural to place the price on the x-axis and the quantity on the y-axis, since the price is more of the "cause" and quantity is more of the "effect", particularly for the buyer.  But economists often do things slightly backwards!  P is always on the y-axis and quantity on the x-axis, and just memorize that.</ref>  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.  '''''The y-axis is typically price, and the x-axis is usually quantity'''''.  Just memorize this rule and stick with it:  price is on the y-axis, and quantity is on the x-axis.<ref>You might think it would be more natural to place the price on the x-axis and the quantity on the y-axis, since the price is more of the "cause" and quantity is more of the "effect", particularly for the buyer.  But economists often do things slightly backwards!  P is always on the y-axis and quantity on the x-axis, and just memorize that.</ref>  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 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 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 supply quantity.

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 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 are independent of each other, but are placed on the same graph so that it becomes easy to find "equilibrium":<ref>The dictionary (Merriam Webster's Collegiate 10th Edition) tells us that an "equilibrium" is "a state of balance between opposing forces" - in this case, the opposing forces of the supplier wanting a higher price, and the public (consumers) wanting a lower price.</ref> 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).   

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":<ref>The dictionary (Merriam Webster's Collegiate 10th Edition) tells us that an "equilibrium" is "a state of balance between opposing forces" - in this case, the opposing forces of the supplier wanting a higher price, and the public (consumers) wanting a lower price.</ref> 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 there will be unsold goods due to less people wanting to pay the higher price.  The sellers will then need to lower their price in order to sell these leftover or unsold goods, and that forces the price downward to the equilibrium price.  Conversely, if the price is lower than the equilibrium price, then the sellers will not have enough goods to satisfy the higher demand by the public.  The sellers will then increase their price (and their revenue) to take advantage of the higher demand.  These market forces both above and below the equilibrium price are what push the final price to the point where the supply curve intersects the demand curve.  At this point the price and quantity for the supply side are precisely equal to the price and quantity for the demand side.

If the price is higher than the equilibrium price, then there will be unsold goods due to fewer people wanting to pay the higher price.  The sellers then need to lower their price in order to sell these leftover or unsold goods, and that forces the price downward to the equilibrium price.  Conversely, if the price is lower than the equilibrium price, then the sellers will not have enough goods to satisfy the higher demand by the public.  The sellers will then increase their price (and their revenue) to take advantage of the higher demand.  These market forces both above and below the equilibrium price are what push the final price to the point where the supply curve intersects the demand curve.  At this point the price and quantity for the supply are precisely equal to the price and quantity for the demand.

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]]

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, but 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, 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 P=300, Q=200.

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:  

<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 demand and supply.  First consider an increase in demand by the public for a particular good:

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:

[[Image:Demand_curve_shift.gif]]

[[Image:Demand_curve_shift.gif]]

   

   

An increase in demand causes the price to rise.  The new equilibrium is at a point with higher price and greater quantity than before.  What could cause an increase in demand?  For gasoline, more people driving would cause an increase in demand.  For heating oil, a colder winter would cause an increase in demand.  For sports entertainment, a close rivalry (as in a hot pennant race between the Yankees and Red Sox) can cause an increase in demand (spectators).  In all these cases, price and quantity tend to rise.  Conversely, if there is a decrease in demand by the public, then the opposite is generally true:  prices and quantity tend to decrease.   

An increase in demand causes the price to rise.  The new equilibrium is at a point with higher price and greater quantity than before.  What could cause an increase in demand?  For gasoline, more people driving would cause an increase in demand.  For heating oil, a colder winter would cause an increase in demand.  For sports entertainment, a close rivalry (as in a close pennant race between the Yankees and Red Sox) can cause an increase in demand (spectators).  In all these cases, price and quantity tend to rise.  Conversely, if there is a decrease in demand by the public, then the opposite is generally true:  prices and quantity decrease.   

Next consider an increase in supply by the producers.  Suppose farmers have better weather, for example, causing more crops at the harvest.  Or suppose there is discovery of huge new oil reserves underground.  Or suppose a new invention, such as Eli Whitney’s cotton gin, increases the production of a good (cotton).  This curve shows what happens when there is an increase in supply:

Next consider an increase in supply by the producers.  Suppose farmers have better weather, for example, causing more crops at the harvest.  Or suppose there is discovery of huge new oil reserves underground.  Or suppose a new invention, such as Eli Whitney’s cotton gin, increases the production of a good (cotton).  This curve shows what happens when there is an increase in supply:

[[Image:Supply_curve_shift.gif]]

[[Image:Supply_curve_shift.gif]]

Can you interpret that?  When the supply curve shifted downward as supply increased, the price decreased but the quantity increased.  The new equilibrium is at 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 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.

== Example:  The Tyndale Bible ==

== Example:  The Tyndale Bible ==