Definition
Supply and Demand Curves are graphical representations of the relationship between the prices of goods and the quantity supplied or demanded at those prices within a particular market. The point at which these two curves intersect shows the market equilibrium, which includes the equilibrium price (the price at which the quantity of goods supplied equals the quantity of goods demanded) and the equilibrium quantity (the amount of goods bought and sold at the equilibrium price).
Examples
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Housing Market: The demand curve represents the number of persons willing to buy houses at various prices, whereas the supply curve represents the number of houses owners are willing to sell at different price points. The intersection determines the market’s equilibrium price and quantity.
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Agricultural Products: For products like wheat, the demand curve shows how much wheat consumers are willing to purchase at various prices, and the supply curve shows how much farmers are willing to produce at those prices. The intersection of these curves gives you the market equilibrium.
Frequently Asked Questions (FAQs)
What is meant by the equilibrium price?
The equilibrium price is the price at which the quantity of a good or service demanded equals the quantity supplied, resulting in a stable market condition with no excess supply or demand.
How does a shift in supply or demand affect equilibrium?
A shift in the demand curve, holding supply constant, will change the equilibrium price and quantity. For example, an increase in demand typically raises both the equilibrium price and quantity. Conversely, a shift in the supply curve will also affect the equilibrium. For instance, an increase in supply, with demand constant, generally reduces the equilibrium price but increases the equilibrium quantity.
What factors can shift the supply and demand curves?
Several factors can shift these curves, including but not limited to: changes in consumer preferences, number of sellers, production technology, input prices, and expectations about future prices.
What happens when the market is not at equilibrium?
If the market price is above the equilibrium price, it results in a surplus where the quantity supplied exceeds the quantity demanded. If the market price is below the equilibrium price, it creates a shortage where the quantity demanded exceeds the quantity supplied.
Why is the equilibrium point considered efficient?
The equilibrium point is considered efficient because at this point, the welfare of both consumers and producers is maximized. There is neither a surplus nor shortage, resulting in optimal distribution of resources.
- Demand Schedule: A table that lists the quantity of a good that consumers are willing to purchase at various prices.
- Supply Schedule: A table that lists the quantity of a good that producers are willing to sell at various prices.
- Market Equilibrium: The state in a market where the quantity demanded equals the quantity supplied, resulting in a stable price.
Online References
Suggested Books for Further Studies
- “Economics” by Paul Samuelson and William Nordhaus
- “Principles of Economics” by N. Gregory Mankiw
- “Microeconomics” by Robert S. Pindyck and Daniel L. Rubinfeld
- “Essentials of Economics” by Paul Krugman and Robin Wells
Fundamentals of Supply and Demand Curves, Supply and Demand Equilibrium: Economics Basics Quiz
### What does the equilibrium price represent?
- [x] The price at which the quantity demanded equals the quantity supplied.
- [ ] The maximum price consumers are willing to pay.
- [ ] The minimum price producers are willing to accept.
- [ ] The average price of goods in the market.
> **Explanation:** The equilibrium price is the price at which the quantity demanded by consumers equals the quantity supplied by producers, resulting in a stable market condition.
### What will happen if there is a surplus in the market?
- [x] The price tends to decrease to reach equilibrium.
- [ ] The demand curve shifts to the left.
- [ ] The supply curve shifts to the right.
- [ ] The quantity demanded increases above the equilibrium level.
> **Explanation:** A surplus occurs when the quantity supplied exceeds the quantity demanded, causing prices to decrease until equilibrium is reached.
### Which factor does NOT directly shift the demand curve?
- [ ] Change in consumer preferences
- [ ] Change in income levels
- [x] Change in production technology
- [ ] Change in the number of consumers
> **Explanation:** Change in production technology affects the supply curve rather than the demand curve as it impacts the producers' ability to supply goods.
### What happens to equilibrium price if the demand increases and the supply remains constant?
- [x] The equilibrium price increases.
- [ ] The equilibrium price decreases.
- [ ] The equilibrium price remains unchanged.
- [ ] The equilibrium price becomes unpredictable.
> **Explanation:** An increase in demand, with the supply remaining constant, typically leads to a higher equilibrium price and quantity until a new equilibrium is reached.
### What is a shortage in economic terms?
- [ ] When the quantity supplied is greater than the quantity demanded.
- [x] When the quantity demanded is greater than the quantity supplied.
- [ ] When the market price is above the equilibrium price.
- [ ] When production costs exceed the market price.
> **Explanation:** A shortage occurs when the quantity demanded at the current price is greater than the quantity supplied, leading to upward pressure on prices.
### Which point on a supply and demand graph indicates the market equilibrium?
- [ ] The peak of the demand curve.
- [ ] The peak of the supply curve.
- [x] The intersection of the supply and demand curves.
- [ ] The point where the supply curve is horizontal.
> **Explanation:** The market equilibrium is found at the intersection of the supply and demand curves, where the quantity demanded equals the quantity supplied.
### What effect does an improvement in production technology have on the supply curve?
- [ ] Shifts the supply curve to the left
- [x] Shifts the supply curve to the right
- [ ] Does not affect the supply curve
- [ ] Shifts both the supply and demand curve to the left
> **Explanation:** Improvements in production technology typically make it cheaper or easier to produce goods, leading to an increase in supply which shifts the supply curve to the right.
### How does a price ceiling typically affect a market?
- [ ] Causes a surplus
- [ ] Has no effect
- [x] Causes a shortage
- [ ] Balances the market immediately
> **Explanation:** A price ceiling, set below the equilibrium price, typically results in a shortage as the quantity demanded exceeds the quantity supplied at the regulated price.
### What is the definition of a demand schedule?
- [ ] A list of quantities supplied at various prices.
- [ ] A timetable for stock deliveries.
- [x] A table that lists the quantity of a good that consumers are willing to purchase at various prices.
- [ ] A production plan for manufacturers.
> **Explanation:** A demand schedule is a table showing the quantity of a good that consumers are willing and able to purchase at different price points.
### What is market equilibrium?
- [x] The situation where the quantity supplied equals the quantity demanded.
- [ ] The situation where production costs are minimized.
- [ ] The point where all businesses make profit.
- [ ] The state when consumer preferences are equal.
> **Explanation:** Market equilibrium is the condition in which the quantity of goods supplied is exactly equal to the quantity of goods demanded.
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