Chapter 3. Demand and Supply
3.1 DEMAND, SUPPLY, AND EQUILIBRIUM IN
MARKETS FOR GOODS AND SERVICES
Learning Objectives
By the end of this section, you will be able to:
Explain demand, quantity demanded, and the law of demand
Identify a demand curve and a supply curve
Explain supply, quantity supply, and the law of supply
Explain equilibrium, equilibrium price, and equilibrium quantity
First let’s first focus on what economists mean by demand, what they mean by supply,
and then how demand and supply interact in a market.
DEMAND FOR GOODS AND SERVICES
Economists use the term demand to refer to the amount of some good or service
consumers are willing and able to purchase at each price. Demand is based on needs
and wants—a consumer may be able to differentiate between a need and a want, but
from an economist’s perspective they are the same thing. Demand is also based on
ability to pay. If you cannot pay for it, you have no effective demand.
What a buyer pays for a unit of the specific good or service is called price. The total
number of units purchased at that price is called the quantity demanded. A rise in
price of a good or service almost always decreases the quantity demanded of that good
or service. Conversely, a fall in price will increase the quantity demanded. When the
price of a gallon of gasoline goes up, for example, people look for ways to reduce
their consumption by combining several errands, commuting by carpool or mass
transit, or taking weekend or vacation trips closer to home. Economists call this
inverse relationship between price and quantity demanded the law of demand. The
law of demand assumes that all other variables that affect demand (to be explained in
the next module) are held constant.
An example from the market for gasoline can be shown in the form of a table or a
graph. A table that shows the quantity demanded at each price, such as Table 1, is
called a demand schedule. Price in this case is measured in dollars per gallon of
gasoline. The quantity demanded is measured in millions of gallons over some time
, period (for example, per day or per year) and over some geographic area (like a state
or a country). A demand curve shows the relationship between price and quantity
demanded on a graph like Figure 1, with quantity on the horizontal axis and the price
per gallon on the vertical axis. (Note that this is an exception to the normal rule in
mathematics that the independent variable (x) goes on the horizontal axis and the
dependent variable (y) goes on the vertical. Economics is not math.)
The demand schedule shown by Table 1 and the demand curve shown by the graph
in Figure 1 are two ways of describing the same relationship between price and
quantity demanded.
Figu
re 1. A Demand Curve for Gasoline. The demand schedule shows that as price rises,
quantity demanded decreases, and vice versa. These points are then graphed, and the
line connecting them is the demand curve (D). The downward slope of the demand
curve again illustrates the law of demand—the inverse relationship between prices
and quantity demanded.
Price (per
Quantity Demanded (millions of gallons)
gallon)
$1.00 800
$1.20 700
$1.40 600
$1.60 550
$1.80 500
$2.00 460
$2.20 420
Table 1. Price and Quantity Demanded of Gasoline
3.1 DEMAND, SUPPLY, AND EQUILIBRIUM IN
MARKETS FOR GOODS AND SERVICES
Learning Objectives
By the end of this section, you will be able to:
Explain demand, quantity demanded, and the law of demand
Identify a demand curve and a supply curve
Explain supply, quantity supply, and the law of supply
Explain equilibrium, equilibrium price, and equilibrium quantity
First let’s first focus on what economists mean by demand, what they mean by supply,
and then how demand and supply interact in a market.
DEMAND FOR GOODS AND SERVICES
Economists use the term demand to refer to the amount of some good or service
consumers are willing and able to purchase at each price. Demand is based on needs
and wants—a consumer may be able to differentiate between a need and a want, but
from an economist’s perspective they are the same thing. Demand is also based on
ability to pay. If you cannot pay for it, you have no effective demand.
What a buyer pays for a unit of the specific good or service is called price. The total
number of units purchased at that price is called the quantity demanded. A rise in
price of a good or service almost always decreases the quantity demanded of that good
or service. Conversely, a fall in price will increase the quantity demanded. When the
price of a gallon of gasoline goes up, for example, people look for ways to reduce
their consumption by combining several errands, commuting by carpool or mass
transit, or taking weekend or vacation trips closer to home. Economists call this
inverse relationship between price and quantity demanded the law of demand. The
law of demand assumes that all other variables that affect demand (to be explained in
the next module) are held constant.
An example from the market for gasoline can be shown in the form of a table or a
graph. A table that shows the quantity demanded at each price, such as Table 1, is
called a demand schedule. Price in this case is measured in dollars per gallon of
gasoline. The quantity demanded is measured in millions of gallons over some time
, period (for example, per day or per year) and over some geographic area (like a state
or a country). A demand curve shows the relationship between price and quantity
demanded on a graph like Figure 1, with quantity on the horizontal axis and the price
per gallon on the vertical axis. (Note that this is an exception to the normal rule in
mathematics that the independent variable (x) goes on the horizontal axis and the
dependent variable (y) goes on the vertical. Economics is not math.)
The demand schedule shown by Table 1 and the demand curve shown by the graph
in Figure 1 are two ways of describing the same relationship between price and
quantity demanded.
Figu
re 1. A Demand Curve for Gasoline. The demand schedule shows that as price rises,
quantity demanded decreases, and vice versa. These points are then graphed, and the
line connecting them is the demand curve (D). The downward slope of the demand
curve again illustrates the law of demand—the inverse relationship between prices
and quantity demanded.
Price (per
Quantity Demanded (millions of gallons)
gallon)
$1.00 800
$1.20 700
$1.40 600
$1.60 550
$1.80 500
$2.00 460
$2.20 420
Table 1. Price and Quantity Demanded of Gasoline
