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If you're seeing this message, it means we're having trouble loading external resources on our website. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. When thinking of markets, you may wonder: what is the driving force behind the relationship between the production and consumption that makes up markets and ultimately economies? This explanation will introduce you to one of the foundational concepts of economics - supply and demand, which is essential in both basic and advanced economics, as well as in your everyday life. Ready? Then read on! Supply and demand definitionSupply and demand is the relationship between the quantities of products or services that producers are willing to provide versus the quantities that consumers are willing to obtain at a range of various prices. While the supply and demand definition may sound complex at first, it is a simple model that visualizes the behaviors of producers and consumers in a given market. This model is largely based on the three main elements:
These are the three core elements that you will need to keep in mind as you work on developing a more comprehensive understanding of the supply and demand model. Keep in mind that these elements are not just random numbers; they are representations of human behavior under the effect of various economic factors that ultimately determines prices and available quantities of commodities. The law of supply and demandBehind the interaction between consumers and producers is the theory known as the law of supply and demand. This law is defined by the relationship between the price of a product or service and the willingness of market actors to either provide or consume that product or service based off that price. You may think of the law of supply and demand as a theory compounded by two complimentary laws, the law of demand and the law of supply. The law of demand states that the higher the price of a good, the lower the quantity consumers will wish to buy. The law of supply, on the other hand, states that the higher the price, the more of that good producers will want to supply. Together, these laws act to drive the price and quantity of goods in the market. The compromise between consumers and producers in price and quantity is known as the equilibrium. The law of demand states that the higher the price of a good the lower the quantity consumers will wish to buy. The law of supply states that the higher the price of a good the more producers will want to supply. Some supply and demand examples include markets for physical goods, where producers supply the product and consumers then purchase it. Another example is markets for various services, where service providers are the producers and users of that service are the consumers. Regardless of what the commodity that is being transacted, the supply and demand relationship between producers and consumers is what fine-tunes the price and quantity of that commodity available, thus allowing the market for it to exist. Supply and demand graphA typical supply and demand graph is easily recognizable by its "criss-cross" system of two functions, one representing supply and the other representing demand. In general, the supply function will have a positive slope, while the demand function will have a negative slope. Supply and demand scheduleSince the supply and demand functions represent data in a market, you need data points to put on a graph to ultimately draw the functions. To make this process organized and easy to follow, you may want to enter your data points, which are different quantities of product or service demanded and supplied at a range of price points, into a table that you will refer to as a schedule. Take a look at Table 1 below for an example:
Table 1: Example of a supply and demand schedule Whether you are drawing your supply and demand graph by hand, using a graphing calculator, or even spreadsheets, having a schedule will not only help you stay organized with your data but insure that your graphs are as accurate as they can be. Demand schedule is a table that shows different quantities of a good or product sought out by consumers at a range of given prices. Supply schedule is a table that shows different quantities of a good or product that producers are willing to supply at a range of given prices. Supply and demand curvesNow that you are familiar with supply and demand schedules, the next step is to put your data points into a graph, thus producing a supply and demand graph. You can do this either by hand on paper or let software do the task. Regardless of the method, the outcome will likely look similar to the graph you can see in Figure 1 provided below as an example: Figure 1. Basic supply and demand graph, StudySmarter Original As you can see from Figure 1, demand is a downward-sloping function and supply slopes upward. Demand slopes downward mainly due to diminishing marginal utility, as well as the substitution effect, which is characterized by consumers seeking alternatives at cheaper prices as the price of the original product rises. The Law of Diminishing Marginal Utility states that as consumption of a good or service increases, the utility derived from every additional unit will decrease. Notice that while both the supply and demand functions in the graph above are linear for the sake of simplicity, you will often see that supply and demand functions can follow different slopes and can often look more like curves rather than simple straight lines, as shown in Figure 2 below. How the supply and demand functions look on a graph depends on what kind of equations provide the best fit for the data sets behind the functions. Figure 2. Non-linear supply and demand functions, StudySmarter Original Supply and Demand: EquilibriumSo why graph supply and demand in the first place? Besides visualizing data about consumers' and producers' behavior in a market, one important task that a supply and demand graph will help you with is finding and identifying the equilibrium quantity and price in the market. Equilibrium is the quantity-price point where quantity demanded equals quantity supplied, and thus produce a stabilized balance between the price and quantity of a product or service in the market. Looking back at the supply and demand graph provided above, you will notice that the point of intersection between the supply and demand functions is labeled as "equilibrium". The equilibrium equating to the point of intersection between the two functions ties into the fact that equilibrium is where consumers and producers (represented by the demand and supply functions, respectively) meet at a compromising price-quantity. Refer to the mathematical representation of the equilibrium below, where Qs equals quantity supplied, and Qd equals quantity demanded. Equilibrium occurs when: \(\hbox{Qs}=\hbox{Qd}\) \(\hbox{Quantity Supplied}=\hbox{Quantity Deamnded}\) There are many other valuable conclusions that you can gather from a supply and demand graph, such as surpluses and shortages. To learn more about surpluses as well as get a deeper understanding of equilibrium, take a look at our explanation on Market Equilibrium and Consumer and Producer Surplus. Determinants of demand and supplyChanges in the price of a good or a service will lead to a movement along the supply and demand curves. However, changes in the demand and supply determinants will shift either the demand or the supply curves respectively. Shifters of supply and demandDeterminants of demand include but are not limited to:
To learn more about how changes in demand determinants affect the demand curve check out our explanation - Shifts in Demand Determinants of supply include but are not limited to:
To learn more about how changes in supply determinants affect the supply curve check out our explanation - Shifts in Supply Elasticity of supply and demandAs you become more familiar with supply and demand and interpreting their corresponding graphs, you will notice that different supply and demand functions vary in the steepness of their slopes and curvatures. The steepness of these curves reflects the elasticity of each supply and demand. Elasticity of supply and demand is a measure that represents how responsive or sensitive each of the functions is to changes in various economic factors, such as price, income, expectations, and others. While both supply and demand are subject to variation in elasticity, it is interpreted differently for each function. Elasticity of demandElasticity of demand represents how sensitive demand is to a change in various economic factors in the market. The more the consumers are responsive to an economic change, in terms of how much that change affects the consumers' willingness to still purchase that good, the more elastic the demand. Alternatively, the less flexible the consumers are to economic fluctuations for a specific good, meaning they likely have to continue purchasing that good regardless of the changes, the more inelastic demand is. You can calculate the price elasticity of demand, for example, simply by dividing the percentage change in quantity demanded by the percentage change in price, as shown by the formula below: The triangle symbol delta means change. This formula refers to the percentage change, such as a 10% decrease in price. \(\hbox{Price elasticity of demand}=\frac{\hbox{% $\Delta$ Quantity demanded}}{\hbox{% $\Delta$ Price}}\) There are three main types of elasticity of demand that you will need to focus on for now:
Elasticity of demand measures how sensitive demand is to changes in various economic factors in the market. Elasticity of supplySupply can also vary in elasticity. One specific type of elasticity of supply is price elasticity of supply, which measures how responsive producers of a certain commodity are to a change in market price for that commodity. You can calculate price elasticity of supply by dividing the percentage change in quantity supplied by the percentage change in price, as shown by the formula below: The triangle symbol delta means change. This formula refers to the percentage change, such as a 10% decrease in price. \(\hbox{Price elasticity of Supply}=\frac{\hbox{% $\Delta$ Quantity Supplied}}{\hbox{% $\Delta$ Price}}\) There are numerous factors that can affect price elasticity of supply, such as availability of resources needed for production, changes in demand for the product that the firm produces, and innovations in technology. To learn more about these factors as well as how to interpret your results from calculating elasticity of supply, see our explanation on Price Elasticity of Supply. Elasticity of supply measures how sensitive supply is to changes in various economic factors in the market. Supply and Demand ExamplesThe concept of supply and demand is relevant throughout the entire field of economics, and that includes macroeconomics and economic government policies. Effect of Government Policies on Supply and DemandGovernments may intervene in the course of economies in order to correct for undesirable effects of the current economic climates, as well as attempt to optimize future outcomes. There are three main tools that regulatory authorities may use to create targeted changes in the economy:
Each of these tools may cause either positive or negative changes in the cost of production of various goods. These changes will impact the behavior of producers, which will ultimately affect the price in the market. You can learn more about the effects of these factors on supply in our explanation of Shift in Supply. The change in market price, in turn, will likely have an effect on consumers' behavior and subsequently, demand. See more on what factors affect demand and how, as well the extent to which these factors will influence demand based on various circumstances, in our explanations on Shifts in Demand and Price Elasticity of Demand. Thus, government policies can have a domino-like effect on supply and demand that can entirely change the state of markets. To find out more about this, check out our explanation on The Effects of Government Intervention in Markets. Government policies may also affect property rights to various resources. Examples of property rights include copyright and patents, which can be applied to intellectual property as well as physical objects. Owning patents or copyrights grants enables exclusivity over the production of a good or service, which leaves consumers with fewer options in the market. This will likely result in the market price increasing, as consumers will have no other choice but to take the price and make a purchase. Supply and Demand - Key takeaways
What is the amount of a good or service that is available?Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.
What is the amount of goods and services available for sale at given prices in a given period of time and place?Key Takeaways
The quantity supplied is the amount of a good or service that is made available for sale at a given price point. In a free market, higher prices tend to lead to a higher quantity supplied and vice versa.
What is quantity of a good or service that produces sell at the market price?Definition: Quantity supplied is the quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.
What is the total amount of a particular good or service available at a given time to consumers at a given price?He is a professor of economics and has raised more than $4.5 billion in investment capital. Supply and demand are both very important to economic activity. Supply is the total amount of a particular good or service available at a given time to consumers at a given price.
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What is the amount of a good or service available in a market at a given price is known as?
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