Home / Review Topics

Economic Concepts

Supply and Demand

A supply curve  describes the relationship between the quantity supplied and the selling price.  The amount of a good or service that producers plan to sell at a given price during a given period is called the quantity supplied.  The quantity supplied is the maximum amount that producers are willing to supply at a given price.  Quantity supplied is expressed as an amount per unit of time.  For example, if a producer plans to sell 750 units per day at $15 per unit we say that the quantity supplied is 750 unit per day at price $15. 

            Similarly, the amount of a good or service that consumers plan to buy at a given price during a given period is called the quantity demanded.  The quantity demanded is the maximum amount that consumers can be expected to buy at a given price, and it also is expressed as amount per unit of time.

            The equilibrium price is the price at which the quantity demanded equals the quantity supplied.  The equilibrium quantity. is the quantity bought and sold at the equilibrium price.  If the curves are graphed on the same coordinate system, the point of intersection is the equilibrium point, and is where supply equals demand.  If the price is below equilibrium there will be a shortage and the price will rise, while if the price is above equilibrium there will be a surplus and the price will fall.  If the price is at equilibrium it will stay there unless other factors enter to cause changes.

  

Example 8

Assume that the supply function is  and the demand function is .  The breakeven point is found by setting equating the two functions and then solving the resulting equation:

This gives the first coordinate;  the second coordinate is  (or, using the demand equation, )

Example 9

We make the following assumptions about supply and demand.

  • The supplier will produce 1000 units when the selling price is $20 per unit and will produce 1500 units if the price is $25 per unit.
  • Consumers will demand 1500 units when the selling price is $20 per unit but that the demand will decrease by 10% if the price increases by 5%.  
  • Both supply and demand functions are linear.

Determine the supply function, the demand function and the equilibrium point.

1)      To determine the supply function, we use a  coordinate system and write the equation of the line through the points (1000,20) and (1500,25).

 

2)      For the demand function, one point is (1500,20).  If the price increases 5% to $21, the demand will decrease 10% to 1350.  Thus the second point is (1350,21) and we can now determine the demand function.