Supply and Demand

A visit to the produce section in the grocery story is a good example of the relationship of supply and demand for similar goods. Imagine your market has six varieties of apples for sale. Now think about the factors that could drive the purchase of one variety over the others. These factors could include price, taste, shelf life, and use. Demand is the relationship between the price of a good and how much of that good consumers want to purchase (all elements being equal). Supply is the relationship (with all elements being equal) between the price of a good and how much of that good is produced or available.

Quantity demanded and quantity supplied represent specific amounts at a specific price. Any price variation will affect quantity demanded and quantity supplied. The other varieties of apples are substitute goods if demand for a single variety outweighs all others. The expectation of future price increases, or a change in personal buying power or personal preferences, can all affect demand. Issues that affect supply include the cost of substitute goods, the cost of producing the goods in question, and worker productivity. Market equilibrium is the state at which the quantity of goods supplied equals the quantity of goods demanded. A surplus results when the quantity of goods supplied is higher than the quantity of goods demanded. When the reverse is true (lower quantity of goods supplied), the result is a shortage. Despite the complexity of markets, market equilibrium stays relatively steady in most cases. Whenever a surplus or a shortage occurs, prices tend to adjust accordingly, which counters any imbalance that would otherwise put either producers or consumers at a disadvantage.

This resource provides instruction for users to:

• Explain what causes changes in demand and quantities demanded
• Explain what causes changes in supply and quantities supplied
• Analyze the effects of changes in supply and demand on market equilibrium