Econ: Supply and Demand Graphs Review


Studying1

Demand and supply are the two forces that make market based economies work.

  • The law of demand states that as the price of a good or service increases, the quantity demanded decreases. As the price decreases, the quantity demanded increases. The inverse relationship of quantity demanded and price can be shown in a demand schedule and graphed as a demand curve.
  • Demand in a market changes when quantities demanded at all prices increase or decrease. On a graph, a change in demand causes the demand curve to shift. Significant demand shifters include popularity, complementary goods, consumer expectations, size of consumer market, income, and substitute goods.
  • The law of supply states that as the price of a good or service increases, the quantity supplied increases. As the price decreases, the quantity supplied decreases. The direct relationship of quantity supplied and price cam be shown in a supply schedule and graphed as a supply curve.
  • Supply in the market changes when quantities supplied at all prices increase or decrease. On a graph, a change in supply causes the supply curve to shift. Significant supply shifters include subsidies and taxes, new technology, other conditions, cost of resource inputs, producer expectations, and size of producer market.

In a free market, demand and supply automatically move prices to equilibrium, the point at which quantity demanded equals quantity supplied.

  • Demand and supply interact to drive prices for goods and services to the equilibrium level. On a graph, the equilibrium point is found at the intersection of the demand and supply curves. The equilibrium price, also known as the market clearing price, may be thought as the “right” price.
  • Disequilibrium occurs when prices are set above or below the equilibrium price. When prices are too low, excess demand leads to shortages. When prices are too high, excess supply leads to surpluses.
  • Many kinds of events can cause demand and supply curves to shift to the right or left. Markets adjust to such changed conditions by seeking a new equilibrium point.
  • Governments sometimes implement price controls when prices are considered unfairly high for consumers or unfairly low for producers. Price floors, such as minimum wage laws, prevent prices from going too low, but lead to excess supply. Price ceilings, such as rent control laws, prevent prices from going too high, but lead to shortages.

Arrows-02-june

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