Unit One: Demand, Supply, and Market Equilibrium

Demand

Elasticity of Demand – a measure of how consumers react to a change in price

1. Elastic Demand: demand that is very sensitive to a change in price

• “Wants” 
• Many substitutes 
• Examples: Fur Coat, Soda, Steak 
• Calculate: E > 1 (Greater than 1) 

2. Inelastic Demand: demand that is not very sensitive to a change in price 

• “Needs” 
• Few to no substitutes 
• Examples: Gas, Milk, Insulin, Soap 
• Calculate: E < 1 (Less than 1) 

3. Unit/Unitary Elastic:

• Calculate: E = 1 (Equal to 1)

Price Ceiling – legal maximum price meant to help buyers

• Keeps price from getting to high
• Example: Rent Control
• Below the equilibrium point on a price and quantity graph
• Consequences (if set to low):
• Lower prices for some consumers
• Shortage
• Long lines for buyers
• Illegal sales above the equilibrium price

Price floor – legal minimum price that is meant to help the seller

• Keep product prices from falling
• Example: Minimum Wage
• Above equilibrium point on a price and quantity graph
• Consequences:
• Higher product prices
• Surplus
• Higher taxes
• Waste 

Supply 

• The law of supply states that a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied.
• Supply curves and supply schedules are tools used to summarize the relationship between supply and price.

Supply schedule and supply curve:

• A supply schedule is a table that shows the quantity supplied at each price.
• A supply curve is a graph that shows the quantity supplied at each price.

Here's an example of a supply schedule from the market for gasoline:

Price (per gallon)	Quantity supplied (millions of gallons)
$\$1.00$dollar sign, 1, point, 00	$500$500
$\$1.20$dollar sign, 1, point, 20	$550$550
$\$1.40$dollar sign, 1, point, 40	$600$600
$\$1.60$dollar sign, 1, point, 60	$640$640
$\$1.80$dollar sign, 1, point, 80	$680$680
$\$2.00$dollar sign, 2, point, 00	$700$700
$\$2.20$dollar sign, 2, point, 20	$720$720

A supply curve for gasoline

The graph shows an upward-sloping supply curve that represents the law of supply.

The supply curve is created by graphing the points from the supply schedule and then connecting them. The upward slope of the supply curve illustrates the law of supply—that a higher price leads to a higher quantity supplied, and vice versa.

Nearly all supply curves, however, share a basic similarity: they slope up from left to right and illustrate the law of supply. Conversely, as the price falls, the quantity supplied decreases.

The difference between supply and quantity supplied

In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices—a relationship that can be illustrated with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve, and quantity supplied refers to a specific point on the curve.

Market Equilibrium 

Key points

• Supply and demand curves intersect at the equilibrium price. This is the price at which the market will operate.

Intersecting supply and demand curves

The graph shows the demand and supply for gasoline where the two curves intersect at the point of equilibrium.

Price per gallon	Quantity supplied in millions of gallons	Quantity demanded in millions of gallons
$\$1.00$dollar sign, 1, point, 00	$500$500	$800$800
$\$1.20$dollar sign, 1, point, 20	$550$550	$700$700
$\red {\$1.40}$start color red, dollar sign, 1, point, 40, end color red	$\red {600}$start color red, 600, end color red	$\red {600}$start color red, 600, end color red
$\$1.60$dollar sign, 1, point, 60	$640$640	$550$550
$\$1.80$dollar sign, 1, point, 80	$680$680	$500$500
$\$2.00$dollar sign, 2, point, 00	$700$700	$460$460
$\$2.20$dollar sign, 2, point, 20	$720$720	$420$420

The equilibrium price is the only price where the plans of consumers and the plans of producers agree—that is, where the amount consumers want to buy of the product, quantity demanded, is equal to the amount producers want to sell, quantity supplied. This common quantity is called the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price.