Quantities at different prices, in a defined market.
Demand shows the quantities buyers are willing and able to buy at different prices over a period. Supply shows the quantities sellers are willing and able to sell. Each curve holds other relevant factors constant. Name the product, place and period first. To get a market curve, add individual quantities at each price; do not add the prices.
- Demand
- Quantities buyers are willing and able to buy at each price over a period, with other influences unchanged.
- Supply
- Quantities sellers are willing and able to sell at each price over the same period, with other influences unchanged.
- The market
- The buyers and sellers of a specified product in a place and period, such as takeaway coffee in a town each day. At each common price, their quantities are added to form market demand or supply.
Reading demand and supply curves
Label the axes
Put the price per unit on the vertical axis and quantity per period on the horizontal axis. For example: dollars per notebook vertically, and notebooks per week horizontally. Name the product and location so the diagram represents a defined market.
Ceteris paribus
This means other things remain unchanged while you examine one change. To study the effect of the good's own price, hold non-price determinants such as income, preferences, other goods' prices, input prices and technology constant. It is an analytical assumption, not a claim that the real world never changes.
Law of demand
In the usual case, a higher own price reduces quantity demanded and a lower own price increases it, other things equal. The demand curve therefore slopes down from left to right. As a good becomes relatively dearer, buyers may switch to alternatives or give up purchases they no longer consider worth the price. These are movements along the same demand curve.
Law of supply
In the usual case, a higher own price increases quantity supplied and a lower own price reduces it, other things equal. The supply curve therefore slopes up from left to right. Extra output may require overtime or less productive resources, making additional units more costly to produce. A higher selling price can make those units worthwhile without changing the non-price determinants of supply.
A point is not a whole curve
Quantity demanded or supplied refers to one price. Demand or supply is the relationship across a range of prices. A change in own price moves to another point; a change in a non-price determinant changes the relationship itself.
Worked example: Two buyers, one market
A drinks market has only two buyers. At $3 a cup, An buys 2 cups a week and Ben buys 3. At $4, An buys 1 and Ben buys 2. Nothing else changes.
- At $3, add 2 + 3: market quantity demanded is 5 cups a week.
- At $4, add 1 + 2: market quantity demanded is 3 cups a week.
- Plot price vertically and cups per week horizontally. These are two points on the same market demand curve.
- For market supply, repeat the addition using sellers' quantities at each common price.
Watch out for this
Demand is how much people want, regardless of whether they can pay.
Wanting a product is not enough. Economic demand requires willingness and ability to buy at the stated price.
Check your understanding
At $2 each, the only three buyers in a market demand 4, 6 and 3 notebooks per month. What is market quantity demanded at $2?
- 6 notebooks: use the largest buyer.
- 13 notebooks per month.
- 26 notebooks per month.