Economics Micro & Macro (CliffsAP)

Supply and Demand

In a market system, the three economic questions what, how, and for whom to produce are answered by the forces of
supply and demand. These forces depend on variables that shift consumer choices and set suppliers’ prices. In a market,
buyers and sellers exchange goods and services. Buyers demand products, and suppliers provide the product.

■ Quantity suppliedis the amount a supplier is willing and able to supply at a certain price.

■ Quantity demandedis the amount a consumer is willing and able to buy at a certain price.

The Law of Supplystates that the higher the price, the greater the quantity produced. When prices decrease, the quan-
tity of that good is decreased. Think of the law of supply in terms of scales. In one hand you have prices and in the
other you have quantity supplied. As one hand rises or falls (prices), the other hand follows (quantity supplied).

The Law of Demandstates that as prices rise, quantity demanded decreases. As prices decrease, quantity demanded
increases. There is an inverse relationship between prices and quantity demanded. You can think of the law of demand
in terms of a seesaw. As one side rises (prices), the other side falls (quantity demanded).

A Closer Look at Demand

Does price change demand?

Polena (a nonsmoker) is walking by the cigarette section in the store and sees that cigarettes have dropped 50 percent
in price. Chances are if she’s thinking rationally, a price change in a product that she has no desire to consume will not
affect her demand for the product. Now if she were a smoker and the price for cigarettes fell, then she would consume
more, according to the law of demand. You can understand this scenario by looking at the difference between quantity
demanded and demand. Quantity demanded is the amount consumers are willing and able to buy at a specific price.
Figure 2-1 shows a demand schedule that illustrates this concept.

Figure 2-1

Figure 2-1 represents a demand schedule for both an individual firm’s demand for baseballs and the whole market demand
for baseballs. The firm’s quantity demanded starts at ten baseballs per day at $1.00 each. As the price increases, the
quantity demanded (the number of baseballs bought at each specific price) falls. The market demand is the sum of all
firms’ demand for baseballs. In the market demand, quantity also falls with each increase in price.

A common error for students is confusing demand with quantity demanded. Quantity demanded is the amount consumed
at a specific price. A change in price will affect quantity demanded, whereas a change in one of the six determinants of
demand will change demand (see the section “The Six Determinants of Demand” later in this chapter).

Price Of

Baseballs

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

QD

Per Day

10

7

5

2

1

0

Price Of

Baseballs

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

QD

15 0

90

75

45

22

0

Individual Demand Market Demand