Focus Questions
What factors affect the price of goods and services?
How does supply and demand work in our economy?
Overview: The principles of supply and demand are among the most basic in economics and are the foundation of a market economy.
By definition, supply is the amount of product that a producer is willing and able to sell at a specified price, while demand is the amount of product that a buyer is willing and able to buy at a specified price.
- "The supply and demand model shows the relationships between a product’s accessibility and the interest shown in it." Quoted in Encyclopedia of Science and Philosophy
Topics on the Page
Essential Vocab & Definitions
Differing Schools of Economics on Supply & Demand
Multicultural Perspectives on Supply & Demand
Video and Multimodal Resources
Lesson Plan Resources
Reading Resources
CROSS-LINKS
U.S. History Cross-Link: The Presidency of Ronald Reagan
World History Cross-Link: Historical Biography page on Keynes, von Mises and other Economists
Economics Cross-Link: Equilibrium Price and Quantity
Essential Vocab & Definitions
Supply - the amount of a product that is available
Demand - the amount of a product that is desired by the consumers
Law of Demand - as price increase, quantity demanded decreases & as price decreases quantity demanded increases
Law of Supply - as price increase, quantity supplied increases & as price decreases quantity supplied decreases
Equilibrium - Where supply and demand are balanced, graphically: the intersection of the supply and demand curves
Supply and demand is displayed on a graph with price on the y-axis and quantity on the x-axis, as shown below. The market the graph is examining in displayed as the title of the graph. In this case, we are looking at the market for corn. Note that in this model the independent variable (price) is on the vertical axis. We have a downward sloping demand curve, labeled "D" and an upward sloping supply curve, labeled "S".
As price goes up, demand goes down (consumers are less likely to buy a good when it costs them more, this is called the Law of Demand), and supply goes up (producers are willing to produce more if there is more possible return from consumers, this is called the Law of Supply).
The intersection of the supply and demand curves is what economists call an equilibrium. Typically, this is where supply is equal to demand. All consumers who are willing to pay that price are able to purchase the good/service (in this case corn) and producers are able to sell all the inventory they would produce at that given price.
This price is called the equilibrium price and the quantity at that price is called the equilibrium quantity. These are represented on the graph at points QE and PE.
In perfect competition, the market will reach this equilibrium point if left unimpeded. This is because at any other price than PE, supply is not equal to demand. If the price was above PE, there would be more corn supplied than demanded (a surplus). When this occurs, producers of corn will lower their prices to get rid of their excess product. More consumers are willing to buy corn as the price decreases, and producers will continue to lower their price until there is no longer a surplus (this is when they arrive at PE).
In contrast, if the price was below PE, there would not be enough corn for all consumers who are willing to consume it at that price (a shortage). Consumers would be willing to pay a higher price to get the product they are clamoring for, while producers would be encouraged by this higher price to produce more of that product. Again, this would continue until there is no longer a shortage. Equilibrium is the most efficient allocation of goods.
Khan Academy: Supply, Demand, and Market Equilibrium
Differing Schools of Economics on Supply and Demand
Keynesian School
Austrian School
Supply-Side Economics
Supply-Side Economics, commonly known as "Reaganomics" or "trickle-down" economics, is the economic theory that argues cutting taxes for investors and entrepreneurs creates incentives for people to invest and save money which will create benefits that trickle down to the rest of the economy.
Supply-Side Economics argues that demand is highly irrelevant.
For example, if companies create excess products and have excess inventory, prices will fall and consumers will buy enough to offset the excess supply.
For people who believe in this economic theory, the supply curve is largely vertical, which means that the only thing that will increase output is increased production of supply goods.
Multicultural Perspectives on Supply & Demand
Ibn Khaldun is recognized as an important scholar in economics, sociology, history, and many other fields.
Ibn Khaldun: Muslim Father of Economics. Ibn Khaldun (1332-1406) was a major Muslim scholar from the "Golden Age of Islam".
He was among the first to write about economics as a science, and among the first to explicitly realize the relation of supply and demand to price.
Click here to read an article on the growing supply-demand gap in Latin America, and its effects on Latin American countries and their citizens.
Click here to learn about the supply and demand in the Asian and Pacific regions, and the attempts being made there at achieving economic equilibrium through the production of gas and oil.
Supply and demand played a key role in the triangular trade across the Atlantic, much of which involved slavery.
Click here for another article on how supply and demand drove southern slavery in the U.S.
Click here for an article that frames supply and demand through the lens of immigration.
[Sources: http://www.investopedia.com/university/economics/economics3.asp]
Video & Multimodal Resources
Economic Schools of Thought Watch this video to learn about a wide variety of economic schools of thought.
Click here to listen to a podcast discussing the law of supply, the supply curve, and the difference between a change in supply and a change in quantity supplied.
Click here for an interactive lecture involving quiz questions and explanations as to why answers are correct or incorrect, as well as a video outlining economic equilibrium between supply and demand.
Lesson Plan Resources
Lesson Plan on Supply and Demand Follow the link to this lesson plan about teaching the basics of supply and demand. It provides simple definitions for different learners, good examples for students to understand the concept, and a few planned activities about the subject matter.
Click here for a lesson plan (9th-12th grade) that analyzes the effects of rising/declining supply and demand using cell phones.
EconEdLink is a great place to find lesson plans and pre-constructed slideshows, worksheets and learning games.
Reading Resources
Click here for an article about the development of the theory of Supply and Demand
The principles of supply and demand can be applied to almost any market for any good. Read this article from 2014 about the demand for coffee.
To read a young reader's lemonade stand-themed book about supply and demand, look into Lemons and Lemonade by Nancy Loewen. (Click here for video read-aloud)
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