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.  The supply curve is usually upward sloping: the higher the sales price, the higher the quantity that companies can produce for sale.  That is because higher sales prices bring in greater revenue to fund the production costs.

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.  The supply curve is usually upward sloping: the higher the sales price, the higher the quantity that companies can produce for sale.  That is because higher sales prices bring in greater revenue to fund the production costs.

The supply and demand is the most basic relationship in all of economics.  It usually looks like this:<ref>Wikipedia open source images used here.</ref>

The supply and demand is the most basic relationship in all of economics.  It usually looks like this:<ref>The graphs here use Wikipedia open source images.</ref>

[[Image:Supply_and_demand.png]]

[[Image:Supply_and_demand.gif]]

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:

[[Image:Demand_curve_shift.png]]

[[Image:Demand_curve_shift.gif]]

   

   

An increase in demand causes price to rise.  The new equilibrium is at a point with higher price and greater quantity than before.   

An increase in demand causes price to rise.  The new equilibrium is at a point with higher price and greater quantity than before.   

Next consider an increase in supply.  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.  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.png]]

[[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 better off.

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 better off.