Supply and Demand
together at last!
SUPPLY and demand TOGETHER
• These two laws are directly contrary to each other. If
suppliers want high prices, but
buyers want low prices, how on
earth does anything get traded?
• The point where:
quantity supplied = quantity demanded
supply
demand
Supply and demand
• Market Equilibrium (aka market clearing price)
• The point at which sellers are willing to sell as much as
buyers are willing to buy
• Qd=Qs
Moving Toward Equilibrium
• Surplus is the condition in which the quantity
supplied of a good is greater than the quantity
demanded. Surpluses occur only at prices above
equilibrium.
• Shortage is the condition in which the quantity
demanded of a good is greater than the quantity
supplied. Shortage occur only at prices below
equilibrium price.
Supply and Demand Interactions
Relationship of quantity supplied
Market
(Qs) to quantity demanded (Qd)
Condition
Qs  Qd
Surplus
Qd  Qs
Shortage
Qd = Qs
Equilibrium
Supply and demand
• Equilibrium or market clearing price
• How difficult is it to find this point?
• It is the single most difficult aspect of business
• All trial and error
• “In the Chips” Activity
• You will need a piece of paper and a pencil
Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
Example:
S
D Surplus
$6.00
If P = $5,
$5.00
then
QD = 9 lattes
$4.00
and
QS = 25 lattes
$3.00
$2.00
resulting in a
surplus of 16 lattes
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Surplus (a.k.a. excess supply):
P
$6.00
D
$5.00
$4.00
Surplus
S
Facing a surplus,
sellers try to increase
sales by cutting price.
This causes
QD to rise and QS to fall…
$3.00
…which reduces the
surplus.
$2.00
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Surplus (a.k.a. excess supply):
P
$6.00
D
$5.00
$4.00
Surplus
S
Facing a surplus,
sellers try to increase
sales by cutting price.
This causes
QD to rise and QS to fall.
$3.00
Prices continue to fall
until market reaches
equilibrium.
$2.00
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
What happens to price when there
is a surplus?
• Surplus
• Suppliers cannot sell all of their goods
• Inventory grows
• Expensive to store
• What happens to price?
• It lowers to the equilibrium price
Shortage (a.k.a. excess demand):
P
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
when quantity demanded is greater than
quantity supplied
Example:
S
D
If P = $1,
then
QD = 21 lattes
and
QS = 5 lattes
resulting in a
shortage of 16 lattes
$0.00
Shortage
0
5
10 15 20 25 30 35
Q
Shortage (a.k.a. excess demand):
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise,
…which reduces the
shortage.
$4.00
$3.00
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
Shortage (a.k.a. excess demand):
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise.
$4.00
$3.00
Prices continue to rise
until market reaches
equilibrium.
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
What happens to price when there
is a shortage?
• Shortage
• Price is below equilibrium causing a high demand
for the good and a low supply
• Buyers will pay higher prices for goods
• Higher prices motivate suppliers to produce more
• Price will rise until it reaches equilibrium