Tuesday, 03 December 2013 11:41

Demand and Supply

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Demand and supply diagrams are the basic building blocks for Microeconomics. It is important that you are able to draw them confidently and understand how they work. Drawn with price (per unit) on the vertical axis, and quantity on the x axis, demand and supply diagrams show 2 things at once.

  1. Demand - the quantity people are willing and able to buy at each price. This slopes down for 2 reasons. As price rises people will substitute away and buy more of relatively cheaper goods that are similar. Also the benefit people gain from the next unit of a good is generally less than the benefit from the one before so people are willing to pay less. The higher the price the less people are willing to buy.
  2. Supply - the quantity firms are willing and able to produce at each price. This slopes up because in the short run, when firms can hire more workers and the like but cannot build new buildings or purchase machinery, the cost of making the next unit is generally higher than the one before so firms must be paid more per unit if we would like them to make more. The higher the price the more firms will be willing to supply to the market.

Where these 2 meet there will be neither a surplus or a shortage - equilibrium. The market doesn't just move to equilibrium straight away, however. The price mechanism uses the rationing, signaling and incentive functions of prices to reach equilibrium.

This tutorial will talk you though drawing the diagram. 

Unfortunately at the moment the tutorials are only available using flash so they may not work on mobile devices.

 

Read 2501 times Last modified on Tuesday, 05 May 2015 15:53
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