Macroeconomics/Supply and Demand
This page may need to be [edit] Markets
One of the most basic elements of macroeconomics is understanding markets. Markets are institutions or mechanisms that bring together demanders (people who wish to acquire a product) and suppliers (those that provide products) of particular goods, services, or resources. Markets can be local, national, or international - all that is required is the link between potential buyers and potential sellers.
In order to provide a simple explanation of supply and demand, let us focus on markets consisting of large numbers of independently acting buyers and sellers who wish to exchange a standardized product. This is a market where the buyers and sellers interact in such a way that market activity sets the price of the good. This is achieved when there are low barriers to entry and exit as supply changes to satisfy demand.
A. The Demand Schedule
2. A demand schedule shows the relationship between the quantity demanded and the price of a commodity, other things held constant. Such a demand schedule, depicted graphically by a demand curve, holds constant other things like family incomes, tastes, and the prices of other goods. Almost all commodities obey the law of downward-sloping demand, which holds that quantity demanded falls as a good's price rises. This law is represented by a downward-sloping demand curve.
3. Many influences lie behind the demand schedule for the market as a whole: average family incomes, population, the prices of related goods, tastes, and special influences. When these influences change, the demand curve will shift.
B. The Supply Schedule
4. The supply schedule (or supply curve) gives the relationship between the quantity of a good that producers desire to sell--other things constant--and that good's price. Quantity supplied generally responds positively to price, so the supply curve is upward-sloping.
5. Elements other than the good's price affect its supply. The most important influence is the commodity's production cost, determined by the state of technology and by input prices. Other elements in supply include the prices of related goods, government policies, and special influences.
C. Equilibrium of Supply and Demand
6. The equilibrium of supply and demand in a competitive market occurs when the forces of supply and demand are in balance. The equilibrium price is the price at which the quantity demanded just equals the quantity supplied. Graphically, we find the equilibrium at the intersection of the supply and demand curves. At a price above the equilibrium, producers want to supply more than consumers want to buy, which results in a surplus of goods and exerts downward pressure on price. Similarly, too low a price generates a shortage, and buyers will therefore tend to bid price upward to the equilibrium.
7. Shifts in the supply and demand curves change the equilibrium price and quantity. An increase in demand, which shifts the demand curve to the right, will increase both equilibrium price and quantity. An increase in supply, which shifts the supply curve to the right, will decrease price and increase quantity demanded.
8. To use supply-and-demand analysis correctly, we must (a) distinguish a change in demand or supply (which produces a shift of a curve) from a change in the quantity demanded or supplied (which represents a movement along a curve); (b) hold other things constant, which requires distinguishing the impact of a change in a commodity's price from the impact of changes in other influences; and (c) look always for the supply-and-demand equilibrium, which comes at the point where forces acting on price and quantity are in balance.
9. Competitively determined prices ration the limited supply of goods among those who demand them.
