Supply and Demand: Schedules, Curves, and Market Equilibrium

Supply and Demand

Introduction to Demand and Supply

The concepts of demand and supply are foundational in microeconomics. They describe how consumers and producers interact in markets to determine prices and quantities of goods and services.

• Demand Schedule: A table showing the quantity of a good consumers are willing to buy at each price.

• Supply Schedule: A table showing the quantity of a good producers are willing to sell at each price.

Demand Schedule Example

The demand schedule lists prices and the corresponding quantity demanded by consumers.

Price (P)	Quantity Demanded (QD)
0	10
1	9
2	8
3	7
4	6
5	5
6	4
7	3
8	2
9	1
10	0

These values can be plotted on a graph to form the demand curve, which typically slopes downward, indicating that as price decreases, quantity demanded increases.

Equation of the Demand Curve

To represent the demand schedule as an equation, we find the price (P) intercept, known as the choke price (where quantity demanded is zero). In this example, the choke price is 10.

• Slope Calculation: The slope is calculated as:

$\text{Slope} = \frac{Q_2 - Q_1}{P_2 - P_1} = \frac{0 - 10}{10 - 0} = -1$

• Thus, the demand equation is:

$P = 10 - Q$

• Alternatively, $Q = 10 - P$

This equation shows the inverse relationship between price and quantity demanded.

Supply Schedule Example

The supply schedule lists prices and the corresponding quantity supplied by producers.

Price (P)	Quantity Supplied (QS)
0	0
1	1
2	2
3	3
4	4
5	5
6	6
7	7
8	8
9	9
10	10

These values can be plotted on a graph to form the supply curve, which typically slopes upward, indicating that as price increases, quantity supplied increases.

Equation of the Supply Curve

• Slope Calculation: The slope is:

$\text{Slope} = \frac{Q_2 - Q_1}{P_2 - P_1} = \frac{10 - 0}{10 - 0} = 1$

• The supply equation is:

$P = Q$

• Alternatively, $Q = P$

Market Equilibrium

Market equilibrium occurs where the quantity demanded equals the quantity supplied. This is the point where the demand and supply curves intersect.

• Equilibrium Price (Pe): The price at which quantity demanded equals quantity supplied.

• Equilibrium Quantity (Qe): The quantity bought and sold at the equilibrium price.

To find the equilibrium:

Set $Q_D = Q_S$:

$10 - P = P$

$10 = 2P$

$P^* = 5$

Substitute $P^*$ into either equation:

$Q^* = 5$

• Thus, the equilibrium price is 5 and the equilibrium quantity is 5 units.

Example:

If the price is set above equilibrium (e.g., $P = 7$), quantity supplied ($Q_S = 7$) exceeds quantity demanded ($Q_D = 3$), resulting in a surplus. If the price is below equilibrium (e.g., $P = 3$), quantity demanded ($Q_D = 7$) exceeds quantity supplied ($Q_S = 3$), resulting in a shortage.

Additional info: The graphical intersection of the demand and supply curves visually demonstrates market equilibrium, a core concept in microeconomics.