Demand is the quantity that buyers wish to buy at each
price. Other things equal, the lower the price, the higher the quantity demanded.
Demand curves slope down.
Supply is the quantity of a good sellers wish to sell
at each price. Other things equal, the higher the price, the higher the quantity.
Supply curves slope upwards.
The market clears, or is in equilibrium, when the price
equates the quantity supplied and the quantity demanded. At this point supply
and demand curves intersect. At prices below the equilibrium price there is
excess demand (shortage), which itself tends to raise the
price. At prices above the equilibrium price there is excess supply
(surplus), which itself tends to reduce the price. In a free market,
deviations from the equilibrium price tend to be self-correcting.
Along a given demand curve, the other things assumed equal are the prices
of related goods, consumer incomes and tastes or habits.
An increase in the price of a substitute good (or decrease
in the price of a complement good) will raise the quantity
demanded at each price. An increase in consumer income will increase demand
for the good if the good is a normal good but decrease demand
for the good if it is an inferior good.
Along a given supply curve the other things assumed constant are technology,
the price of inputs and the degree of government regulation. An improvement
in technology, or a reduction in input prices, will increase the quantity
supplied at each price.
Any factor inducing an increase in demand shifts the demand curve to the
right, increasing equilibrium price and equilibrium quantity. A decrease in
demand (downward shift of the demand curve) reduces both equilibrium price
and equilibrium quantity. Any factor increasing supply shift s the supply
curve to the right, increasing equilibrium quantity but reducing
equilibrium price. Reductions in supply (left ward shift of the supply curve)
reduce equilibrium quantity but increase equilibrium price.
To be effective, a price ceiling must be imposed below
the free market equilibrium price. It will then reduce the quantity supplied
and lead to excess demand unless the government itself provides the extra
quantity required. An effective price floor must be imposed
above the free market equilibrium price. It will then reduce the quantity
demanded unless the government adds its own demand to that of the private
sector.
