According to the economic model of supply and demand, supply refers to the quantity of a product that suppliers can produce at a certain price. Demand represents the quantity of a product that consumers are willing to purchase at a certain price. Supply curves usually have an upward slope, because producers can sell more products if they are at higher prices. Demand curves slope downwards, because people are willing to purchase more items when the price is lower. The intersection of the demand and supply curves is the equilibrium price. Changes in supply or demand affect the equilibrium price.
Increases in Demand
Consumer demand increases occur when consumers change their preferences. For example, an effective advertising campaign or the results of a medical study on a certain food could change consumer preferences. Demand also increases for most goods when consumer income increases, or if substitute goods become more expensive. A change in population or demographics could also shift demand. When demand increases, the curve shifts to the right, resulting in a higher equilibrium price.
Decreases in Demand
Decreases in consumer demand may occur when consumer income decreases. The demand for some goods, called inferior goods, increases when income decreases, but a decrease in income usually causes a decrease in demand. Changes in consumer preferences can also decrease demand. For example, a study or news story about the dangers of a product could decrease demand. Decreases in the price of substitute goods may also decrease demand, as could a loss in population or change in demographics. When demand decreases, the curve shifts to the left, resulting in a lower equilibrium price.
Increases in Supply
Increases in supply occur when technology improves, making production more efficient, or when labor costs fall, making production less expensive. A decrease in the cost of input goods or resources also increases supply. An increase in the supply curve shifts the curve to the right, resulting in a lower equilibrium price.
Decreases in Supply
Decreases in supply occur when labor becomes more expensive or more scarce, driving up the cost of production. A price increase or shortage of input goods or resources also decreases the quantity of goods a firm can produce at a certain price. A decrease in the supply curve shifts the curve to the left, resulting in a higher equilibrium price.
- "Economics: Principles and Policy"; William J. Baumol, Alan S. Blinder; 2008
- California State University Northridge: Price Theory Lecture 2: Supply & Demand
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