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The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S).

In Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. It considers individuals both as suppliers of labour and capital and as the ultimate consumers of the final product. On the other hand, it analyses firms both... microeconomic In mathematics, theory is used informally to refer to a body of knowledge about mathematics. This knowledge consists of axioms, definitions, theorems and computational techniques all related in some way by tradition or practice. Examples include group theory, set theory, Lebesgue integration theory and field theory. The term theory also... theory, the partial In economics, if a market for a product has attained the price where the amount supplied of a certain product equals the quantity demanded then it has cleared. In most markets, this supply and demand balance is an economic equilibrium. The concept of equilibrium is also applied to describe and... equilibrium supply and demand A diagram of the IS/LM model In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and quantitative relationships between them. As in other fields, models are simplified frameworks designed to illuminate complex processes. Contents // 1 Overview... economic model originally developed by Alfred Marshall Alfred Marshall (July 26, 1842 - July 13, 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. His book, Principles of Political Economy (1890) brought together the theories of supply and demand, of marginal utility and of the costs of production into... Alfred Marshall attempts to describe, explain, and Prediction of future events is an ancient human wish. An apocryphal saying states: it is difficult to make predictions, especially about the future. However, the desire to make predictions remains as strong as ever, and is an important part of almost every aspect of human life. In a scientific context... predict changes in the For people whose family name is Price see Price (disambiguation). In economics and business, the price is the assigned numerical monetary value of a good, service or asset. The concept of price is central to microeconomics where it is one of the most important variables in resource allocation theory (also... price and quantity of A good in economics is anything that increases utility. This contrasts with a bad that decreases utility. Another way of think of it is that a good is something that you want more of, and a bad is something that you want less of. For example, leisure is a good... goods sold in In economic theory, perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. This leads to an outcome which is efficient, according to the economic definition of Pareto efficiency. The analysis of perfectly competitive markets provides the foundation of... competitive Chichicastenango, Guatemala traditional market Market stall in internally displaced persons camp in Kitgum, northern Uganda Mercado dos Lavradores, Funchal (Madeira Islands) A market is a mechanism which allows people to trade, normally governed by the theory of supply and demand. Both general and specialised markets, where only one commodity is... markets. The model represents a first approximation for describing a market that is not perfectly competitive. It formalizes the theories used by some economists before Marshall and is one of the most fundamental models of some modern economic schools, widely used as a basic building block in a wide range of more detailed Economics is the social science studying production and consumption through measurable variables. It involves analysing the production, distribution, trade and consumption of goods and services. Economics is said to be positive when it attempts to explain the consequences of different choices given a set of assumptions and normative when it... economic models and theories. The theory of The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase... supply and The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase... demand is important for some economic schools understanding of a A market economy is a term used to describe an economy where economic decisions, such as pricing of goods and services, are made in a decentralized manner by the economys participants and manifested by trade. This can be seen as a bottom-up approach to organizing an economy ( self... market economy in that it is an explanation of the mechanism by which many In strategic planning, a resource-allocation decision is a plan for using available resources, especially in the near term, to achieve goals for the future. The plan has two parts: (1) the basic allocation decision; and (2) contingency mechanisms. The basic allocation decision is the choice of which items to... resource allocation decisions are made. However, unlike General Equilbrium (linear) supply and demand curves. This diagram is based on Walras analysis. General equilibrium theory is a branch of theoretical microeconomics. It seeks to explain production, consumption and prices in a whole economy. This article considers neoclassical approaches to general equilibrium. Investigations into the interaction of markets arguably... general equilibrium models, supply schedules in this General Equilbrium (linear) supply and demand curves. This diagram is based on Walras analysis. General equilibrium theory is a branch of theoretical microeconomics. It seeks to explain production, consumption and prices in a whole economy. This article considers neoclassical approaches to general equilibrium. Investigations into the interaction of markets arguably... partial equilbrium model are fixed by unexplained forces.

Contents

Assumptions and definitions

The theory of supply and demand usually assumes that markets are In economic theory, perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. This leads to an outcome which is efficient, according to the economic definition of Pareto efficiency. The analysis of perfectly competitive markets provides the foundation of... perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to influence the price of the good. In many real life transactions, the assumption fails because some individual buyers or sellers or groups of buyers or sellers do have enough ability to influence prices. Quite often a sophisticated analysis is required to understand the demand-supply equation of a good.However, the theory works well in simple situations.


Mainstream economics does not assume A priori is a Latin phrase meaning from the former or less literally before experience. In much of the modern Western tradition, the term a priori is considered to mean propositional knowledge that can be had without, or prior to, experience. It is usually contrasted with a posteriori knowledge meaning... a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where so-called In economics, a market failure is a case in which a market fails to efficiently provide or allocate goods and services. In more general terms, market failures are situations where market forces do not serve the perceived public interest. Economists use model-like theorems to explain such cases. The two... market failures lead to resource allocation that is suboptimal by some standard. In such cases, economists may attempt to find policies that will avoid waste; directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating 'missing' markets to enable efficient trading where none had previously existed. This is studied in the field of The economic theory of collective action is concerned with the provision of public goods (and other collective consumption) through the collaboration of two or more individuals, and the impact of externalities on group behavior. The foundational work in collective action was Mancur Olsons 1971 book The Logic of Collective... collective action.


Demand

Demand is that quantity of a good that consumers are not only willing to buy but also have the capacity to buy at the given price. For example, a consumer may be willing to purchase 2 lbs of Potato Scientific classification Kingdom: Plantae Division: Tracheobionta Class: Magnoliopsida Subclass: Asteridae Order: Solanales Family: Solanaceae Genus: Solanum Species: S. tuberosum Binomial name Solanum tuberosum L. The potato (Solanum tuberosum) is a perennial plant of the Solanaceae, or nightshade, family, grown for its starchy tuber. Potatoes form the worlds most... potatoes if the price is $0.75 per lb. However, the same consumer may be willing to purchase only 1 lb. if the price is $1.00 per lb. A demand schedule can be constructed that shows the quantity demanded at each given price. It can be represented on a graph as a line or curve by plotting the quantity demanded at each price. It can also be described mathematically by a demand equation. The main determinants of the quantity one is willing to purchase will typically be the price of the good, one's level of income, personal tastes, the price of In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. Classic examples of substitute goods include margarine... substitute goods, and the price of A complement good (or complementary good) is a good that should be consumed with another good. In economics, it is a good whose cross elasticity of demand is negative. This means that if more of Good A were bought, more of Good B would also be bought if they were... complementary goods.


Supply

Supply is the quantity that producers are willing to sell at a given price. For example, the potato grower may be willing to sell 1 million lbs of potatoes if the price is $0.75 per lb and substantially more if the market price is $0.90 per lb. The main determinants of supply will be the market price of the good and the cost of producing it. In fact, supply curves are constructed from the firm's long-run cost schedule.


Simple supply and demand curves

Mainstream economic theory centers on creating a series of supply and demand relationships, describing them as This article is about equations in mathematics. For equations in chemistry, see chemical equation. In mathematics, one often (not quite always) distinguishes between an identity, which is an assertion that two expressions are equal regardless of the values of any variables that occur within them, and an equation, which may... equations, and then adjusting for factors which produce "stickiness" between supply and demand. Analysis is then done to see what "trade offs" are made in the "market" which is the negotiation between sellers and buyers. Analysis is done as to what point the ability of sellers to sell becomes less useful than other opportunities. This is related to "marginal" costs - or the price to produce the last unit that can be sold profitably, versus the chance of using the same effort to engage in some other activity.

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Graph of simple supply and demand curves

The slope of the demand curve (downward-to-the-right) indicates that a greater quantity will be demanded when the price is lower. On the other hand, the slope of the supply curve (upward-to-the-right) tells us that as the price goes up, producers are willing to produce more goods. The point where these curves intersect is the In economics, if a market for a product has attained the price where the amount supplied of a certain product equals the quantity demanded then it has cleared. In most markets, this supply and demand balance is an economic equilibrium. The concept of equilibrium is also applied to describe and... equilibrium point. At a price of P producers will be willing to supply Q units per period of time and buyers will demand the same quantity. P in this example, is the equilibriating price that equates supply with demand.


In the figures, straight lines are drawn instead of the more general curves. This is typical in analysis looking at the simplified relationships between supply and demand because the shape of the curve does not change the general relationships and lessons of the supply and demand theory. The shape of the curves far away from the equilibrium point are less likely to be important because they do not affect the market clearing price and will not affect it unless large shifts in the supply or demand occur. So straight lines for supply and demand with the proper slope will convey most of the information the model can offer. In any case, the exact shape of the curve is not easy to determine for a given market. The general shape of the curve, especially its slope near the equilibrium point, does however have an impact on how a market will adjust to changes in demand or supply. See the below section on The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase... elasticity.


It should be noted that on supply and demand curves both are drawn as a In mathematics, a function is a relation, such that each element of a set (the domain) is associated with a unique element of another (possibly the same) set (the codomain, not to be confused with the range). The concept of a function is fundamental to virtually every branch of mathematics... function of price. Neither is represented as a function of the other. Rather the two functions interact in a manner that is representative of market outcomes. The curves also imply a somewhat neutral means of measuring price. In practice any currency or commodity used to measure price is also the subject of supply and demand.


Effects of being away from the equilibrium point

Oversupply

Now consider how prices and quantities not at the equilibrium point tend to move towards the equilibrium. Assume that some organization (say government or industry cartel) has the ability to set prices. If the price is set too high, such as at P1 in the diagram to the right, then the quantity produced will be Qs. The quantity demanded will be Qd. Since the quantity demanded is less than the quantity supplied there will be an oversupply (also called surplus or excess supply). On the other hand, if the price is set too low, then too little will be produced to meet demand at that price. This will cause an undersupply problem (also called a shortage).


Now assume that individual firms have the ability to alter the quantities supplied and the price they are willing to accept, and consumers have the ability to alter the quantities that they demand and the amount they are willing to pay. Businesses and consumers will respond by adjusting their price (and quantity) levels and this will eventually restore the quantity and the price to the equilibrium.

Adjustment in the case of oversupply

In the case of too high a price and oversupply, (seen in the diagram at the left) the profit maximizing businesses will soon have too much excess inventory, so they will lower prices (from P1 to P) to reduce this. Quantity supplied will be reduced from Qs to Q and the oversupply will be eliminated. In the case of too low a price and undersupply, consumers will likely compete to obtain the good at the low price, but since more consumers would like to buy the good at the price that is too low, the profit maximizing firm would raise the price to the highest they can, which is the equilibrium point. In each case, the actions of independent market participants cause the quantity and price to move towards the equilibrium point.



Demand curve shifts

When more people want something, the quantity demanded at all prices will tend to increase. This can be referred to as an increase in demand. The increase in demand could also come from changing tastes, where the same consumers desire more of the same good than they previously did. Increased demand can be represented on the graph as the curve being shifted right, because at each price point, a greater quantity is demanded. An example of this would be more people suddenly wanting more coffee. This will cause the demand curve to shift from the initial curve D0 to the new curve D1. This raises the equilibrium price from P0 to the higher P1. This raises the equilibrium quantity from Q0 to the higher Q1. In this situation, we say that there has been an increase in demand which has caused an extension in supply.


Conversely, if the demand decreases, the opposite happens. If the demand starts at D1, and then decreases to D0, the price will decrease and the quantity supplied will decrease - a contraction in supply. Notice that this is purely an effect of demand changing. The quantity supplied at each price is the same as before the demand shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the demand is different.


Supply curve shifts

When the suppliers' costs change the supply curve will shift. For example, assume that someone invents a better way of growing Wheat Scientific classification Kingdom: Plantae Division: Magnoliophyta Class: Liliopsida Order: Poales Family: Poaceae Genus: Triticum Species T. aestivum T. aethiopicum T. araraticum T. boeoticum T. carthlicum T. compactum T. dicoccon T. durum T. ispahanicum T. karamyschevii T. militinae T. monococcum T. polonicum T. spelta T. timopheevii T. trunciale T. turanicum... wheat so that the amount of wheat that can be grown for a given cost will increase. Producers will be willing to supply more wheat at every price and this shifts the supply curve S0 to the right, to S1 - an increase in supply. This causes the equilibrium price to decrease from P0 to P1. The equilibrium quantity increases from Q0 to Q1 as the quantity demanded increases at the new lower prices. Notice that in the case of a supply curve shift, the price and the quantity move in opposite directions.


Conversely, if the quantity supplied decreases, the opposite happens. If the supply curve starts at S1, and then shifts to S0, the equilibrium price will increase and the quantity will decrease. Notice that this is purely an effect of supply changing. The quantity demanded at each price is the same as before the supply shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the supply is different.


See also: Induced demand is the phenomenon that after supply increases, more of a good is consumed. This is entirely consistent with the economic theory of supply and demand, however has become important in the debate over the expansion of transportation systems. In the image, when supply is expanded from S0 to... Induced demand


Market 'clearance'

The market 'clears' at the point where all the supply and demand at a given price balance. That is, the amount of a commodity available at a given price equals the amount that buyers are willing to purchase at that price. It is assumed that there is a process that will result in the market reaching this point, but exactly what the process is in a real situation is an ongoing subject of research. Markets which do not clear will react in some way, either by a change in price, or in the amount produced, or in the amount demanded. Graphically the situation can be represented by two curves: one showing the price-quantity combinations buyers will pay for, or the In economics, the demand curve can be defined as the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. Other determinants of demand such as income, taste and preference, prices of... demand curve; and one showing the combinations sellers will sell for, or the The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase... supply curve. The market clears where the two are in equilibrium, that is where the curves intersect. In a General Equilbrium (linear) supply and demand curves. This diagram is based on Walras analysis. General equilibrium theory is a branch of theoretical microeconomics. It seeks to explain production, consumption and prices in a whole economy. This article considers neoclassical approaches to general equilibrium. Investigations into the interaction of markets arguably... general equilibrium model, all markets in all goods clear simultaneously and the 'price' can be described entirely in terms of tradeoffs with other goods. For a century most economists believed in Say's Law, which states that markets, as a whole, would always clear and thus be in balance.


Elasticity

Main article: In economics, elasticity is the ratio of the incremental percentage change in one variable with respect to an incremental percentage change in another variable. Elasticity is usually expressed as a (positive) absolute value when the sign is already clear from context. Contents // 1 Generalised cases 2 Mathematical definition 3 Importance... Elasticity (economics)


An important concept in understanding supply and demand theory is elasticity. In this context, it refers to how supply and demand change in response to various stimuli. One way of defining elasticity is the percentage change in one variable divided by the percentage change in another variable (known as arch elasticity because it calculates the elasticity over a range of values - This can be contrasted with point elasticity that uses differential calculus to determine the elasticity at a specific point). Thus it is a measure of relative changes.


Often, it is useful to know how the quantity supplied or demanded will change when the price changes. This is known as the In economics, the price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price. The formula used to calculate the coefficient of price elasticity of demand is Price elasticity of demand is measured as the percentage change in quantity demanded that occurs in response... price elasticity of demand and the In economics, the price elasticity of supply measures the responsiveness of the quantity supplied of a good to its price. It is measured as the percentage change in supply that occurs in response to a percentage change in price. For example, if, in response to a 10% rise in the... price elasticity of supply. If a This article is about economic monopoly. For the board game, see Monopoly (board game). For the game show based on this board game, see Monopoly (game show). In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only... monopolist decides to increase the price of their product, how will this affect their sales revenue? Will the increased unit price offset the likely decrease in sales volume? If a government imposes a A tax is an involuntary fee paid by individuals or businesses to a government. Taxes may be paid in cash or kind (although payments in kind may not always be allowed or classified as taxes in all systems). The means of taxation, and the uses to which the funds raised... tax on a good, thereby increasing the effecive price, how will this affect the quantity demanded?


If you do not wish to calculate elasticity, a simpler technique is to look at the slope of the curve. Unfortunately, this has units of measurement of quantity over monetary unit (For example, The litre (or liter in US) is a metric unit of volume. The litre is not an SI unit, but (along with units such as hours and days) is listed as one of the units outside the SI that are accepted for use with the SI. The SI unit of... liters per Euro (disambiguation). The euro (€; ISO 4217 code EUR) is the currency of twelve of the twenty-five European Union member states. These twelve states, which form the Economic and Monetary Union (EMU), are: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. It is... euro, or This article is about a battleship as a type of warship. See also Battleship (game). Dreadnought redirects here. See also Workers Dreadnought. HMS Victory in 1884 In naval history, battleships were the most heavily armed and armored warships afloat. They were designed to engage enemy warships with direct and indirect... battleships per million A 1,000 yen note, featuring the portrait of Natsume Soseki. New yen notes entered circulation, replacing these, on November 1, 2004. Yen is the currency used in Japan. It is also widely used as a reserve currency after the United States Dollar and Euro. In Japanese it is usually... yen), which is not a convenient measure to use for most purposes. So, for example if you wanted to compare the effect of a price change of Petrol (gasoline in the United States and Canada) is a petroleum-derived liquid mixture consisting primarily of hydrocarbons, used as fuel in internal combustion engines. The term gasoline is the common usage within the oil industry, even within companies that are not American. Often the term mogas (short for motor... gasoline in World map showing location of Europe A satellite composite image of Europe Europe is geologically and geographically a peninsula, forming the westernmost part of Eurasia. It is conventionally considered a continent, which, in this case, is more of a cultural distinction than a geographic one. ( National Geographic, however, officially recognises... Europe versus the The United States of America — also referred to as the United States, the U.S.A., the U.S., America¹, the States, or (archaically) Columbia — is a federal republic of 50 states located primarily in central North America (with the exception of two states: Alaska and Hawaii... United States, there is a complicated conversion between The gallon is a unit of volume used for measuring liquids (as well as dry matter). In the US a fluid gallon is exactly 3.785 411 784 litres: see U.S. customary units An Imperial gallon is exactly 4.546 09 litres: see Imperial unit. At one time, the... gallons per Alternate uses: Dollar (disambiguation) The dollar is the name of the official currency in several countries, dependencies and other regions (see list below). It is represented by the symbol $. The name is related to the historic currencies Tolar in Bohemia, Thaler in Germany, Daalder in the Netherlands and Daler in... dollar and liters per euro. This is one of the reasons why economists often use relative changes in percentages, or elasticity. Another reason is that elasticity is more than just the slope of the function: It is the slope of a function in a coordinate space, that is, a line with a constant slope will have different elasticity at various points.


Lets do an example calculation. We have said that one way of calculating elasticity is the percentage change in quantity over the percentage change in price. So, if the price moves from $1.00 to $1.05, and the quantity supplied goes from 100 pens to 102 pens, the slope is 2/0.05 or 40 pens per dollar. Since the elasticity depends on the percentages, the quantity of pens increased by 2%, and the price increased by 5%, so the elasticity is 2/5 or 0.4.


Since the changes are in percentages, changing the unit of measurement or the currency will not affect the elasticity. If the quantity demanded or supplied changes a lot when the price changes a little, it is said to be elastic. If the quantity changes little when the prices changes a lot, it is said to be inelastic. An example of perfectly inelastic supply, or zero elasticity, is represented as a The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase... vertical supply curve. (See that section below)


Elasticity in relation to variables other than price can also be considered. One of the most common to consider is Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. For example, most individuals income is the money they receive from their regular paychecks. In business and accounting, income (also known as profit or earnings) is, more... income. How would the demand for a good change if income increased or decreased? This is known as the In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the income of the people demanding the good. It is measured as the percentage change in demand that occurs in response to a percentage change in income. For example, if, in response... income elasticity of demand. For example how much would the demand for a luxury A small variety of cars, the most popular kind of automobile. An automobile is a wheeled vehicle that carries its own engine. Different types of automobile include cars, buses, vans and trucks, with cars being the most popular by far. Older terms include horseless carriage and motor car, with motor... car increase if average income increased by 10%? If it is positive, this increase in demand would be represented on a graph by a positive shift in the demand curve, because at all price levels, a greater quantity of luxury cars would be demanded.


Another elasticity that is sometimes considered is the In economics, the cross elasticity of demand or cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to... cross elasticity of demand which measures the responsiveness of the quantity demanded of a good to a change in the price of another good. This is often considered when looking at the relative changes in demand when studying A complement good (or complementary good) is a good that should be consumed with another good. In economics, it is a good whose cross elasticity of demand is negative. This means that if more of Good A were bought, more of Good B would also be bought if they were... complement and In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. Classic examples of substitute goods include margarine... substitute goods. Complement goods are goods that are typically utilized together, where if one is consumed, usually the other is also. Substitute goods are those where one can be substituted for the other and if the price of one good rises, one may purchase less of it and instead purchase its substitute.


Cross elasticity of demand is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For an example with a complement good, if, in response to a 10% increase in the price of fuel, the quantity of new cars demanded decreased by 20%, the cross elasticity of demand would be -20%/10% or, -2.


Vertical supply curve

It is sometimes the case that the supply curve is vertical: that is the quantity supplied is fixed, no matter what the market price. For example, the amount of land in the world can be considered fixed. In this case, no matter how much someone would be willing to pay for a piece of land, the extra cannot be created. Also, even if no one wanted all the land, it still would exist. These conditions create a vertical supply curve, giving it zero elasticity (ie. - no matter how large the change in price, the quantity supplied will not change).


In the short run near vertical supply curves are even more common. For example, if the The Super Bowl is the championship game of the National Football League, the pinnacle of American football. The game is almost like a national holiday for the United States. It is held annually on the last Sunday in January or the first Sunday in February, and is one of the... Super Bowl is next week, increasing the number of seats in the stadium is almost impossible. The supply of tickets for the game can be considered vertical in this case. If the organizers of this event underestimated demand, then it may very well be the case that the price that they set is below the equilibrium price. In this case there will likely be people who paid the lower price who only value the ticket at that price, and people who could not get tickets, even though they would be willing to pay more. If some of the people who value the tickets less sell them to people who are willing to pay more (i.e. scalp the tickets), then the effective price will rise to the equilibrium price.


The graph below illustrates a vertical supply curve. When the demand 1 is in effect, the price will be p1. When demand 2 is occurring, the price will be p2. Notice that at both values the quantity is Q. Since the supply is fixed, any shifts in demand will only affect price.


 Diagram of vertical supply curve


Other In economics, the main criteria by which one can distinguish between different market forms are: the number and size of producers and consumers on the market, the type of goods and services being traded, and the degree to which information can flow freely. The major market forms are: Perfect competition... market forms

In a situation in which there are many buyers but a single This article is about economic monopoly. For the board game, see Monopoly (board game). For the game show based on this board game, see Monopoly (game show). In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only... monopoly supplier that can adjust the supply or price of a good at will, the monopolist will adjust the price so that his profit is maximised given the amount that is demanded at that price. This price will be higher than in a competitive market. A similar analysis using supply and demand can be applied when a good has a single buyer, a In economics, a monopsony is a market with only one buyer in the market, often an input market. This is analogous to the case of a monopoly in which there is only one seller in a market. During the era of the robber barons, John D. Rockefeller used his monopsony... monopsony, but many sellers.


Where there are both few buyers or few sellers, the theory of supply and demand cannot be applied because both decisions of the buyers and sellers are interdependent - changes in supply can affect demand and vice versa. This article discusses the mathematical modelling of incentive structures. For other games (and their theories) see Game (disambiguation). Game theory is a branch of mathematics that uses models to study interactions with formalised incentive structures (games). It has applications in a variety of fields, including economics, evolutionary biology, political science... Game theory can be used to analyse this kind of situation. See also An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic... oligopoly.


The supply curve does not have to be linear. However, if the supply is from a profit maximizing firm, it can be proven that supply curves are not downward sloping (i.e. if the price increases, the quantity supplied will not decrease). Supply curves from profit maximizing firms can be vertical, horizontal or upward sloping. While it is possible for industry supply curves to be downward sloping, supply curves for individual firms are never downward sloping).


Standard microeconomic assumptions cannot be used to prove that the demand curve is downward sloping. However, despite years of searching, no generally agreed upon example of a good that has an upward sloping demand curve has been found (also known as a For most products, price elasticity of demand is negative. In other words, price and demand pull in opposite directions; price goes up and quantity demanded goes down, or vice versa. Giffen goods are an exception to this. Their price elasticity of demand is positive. When price goes up the quantity... giffen good). Non-economists sometimes think that certain goods would have such a curve. For example, some people will buy a luxury car because it is expensive. In this case the good demanded is actually Prestige means good reputation or high esteem, although it originally meant a delusion or magicians trick (Latin præstigum). Categories: Stub ... prestige, and not a car, so when the price of the luxury car decreases, it is actually changing the amount of prestige so the demand is not decreasing since it is a different good (see A commodity is a Veblen good if peoples preference for buying it increases as a direct function of its price. The definition does not require that any Veblen goods actually exist. However, it is claimed that some types of high-status goods, such as expensive wines or perfumes are... Veblen good). Even with downward sloping demand curves, it is possible that an increase in income may lead to a decrease in demand for a particular good, probably due to the existence of more attractive alternatives which become affordable: a good with this property is known as an In consumer theory, an inferior good is one for which demand decreases when income rises, unlike the more common normal goods, for which the opposite is observed. Inferiority, in this sense, is an observable fact rather than a statement about the quality of the good. National bus service, such as... inferior good.


An example: Supply and demand in a 6-person economy

Supply and demand can be thought of in terms of individual people interacting at a market. Suppose the following six people participate in this simplified economy:

  • Alice is willing to pay $10 for a sack of potatoes.
  • Bob is willing to pay $20 for a sack of potatoes.
  • Cathy is willing to pay $30 for a sack of potatoes.
  • Dan is willing to sell a sack of potatoes for $5.
  • Emily is willing to sell a sack of potatoes for $15.
  • Fred is willing to sell a sack of potatoes for $25.

There are many possible trades that would be mutually agreeable to both people, but not all of them will happen. For example, Cathy and Fred would be interested in trading with each other for any price between $25 and $30. If the price is above $30, Cathy is not interested, since the price is too high. If the price is below $25, Fred is not interested since the price is too low. However at the market, Cathy will discover that there are other sellers willing to sell at well below $25, so she will not trade with Fred at all. In an efficient market, each seller will get as high a price as possible, and each buyer will get as low a price as possible.


Imagine that Cathy and Fred are bartering over the price. Fred offers $25 for a sack of potatoes. Before Cathy can agree, Emily offers a sack of potatoes for $24. Fred is not willing to sell at $24, so he drops out. At this point, Dan offers to sell for $12. Emily won't sell for that amount so it looks like the deal might go through. At this point Bob steps in and offers $14. Now we have two people willing to pay $14 for a sack of potatoes (Cathy and Bob), but only one person (Dan) willing to sell for $14. Cathy notices this, and doesn't want to lose a good deal, so she offers Dan $16 for his potatoes. Now Emily also offers to sell for $16, so there are two buyers and two sellers at that price (note that they could have settled on any price between $15 and $20), and the bartering can stop. But what about Fred and Alice? Well, Fred and Alice are not willing to trade with each other since Alice is only willing to pay $10 and Fred will not sell for any amount under $25. Alice can't outbid Cathy or Bob to purchase from Dan so Alice will not be able to get a trade with them. Fred can't underbid Dan or Emily so he will not be able to get a trade with Cathy. In other words, a stable equilibrium has been reached.

Graph of discrete example

A supply and demand graph could also be drawn from this. The demand would be:

  • 1 person is willing to pay $30 (Cathy).
  • 2 people are willing to pay $20 (Cathy and Bob).
  • 3 people are willing to pay $10 (Cathy, Bob, and Alice).

The supply would be:

  • 1 person is willing to sell for $5 (Dan).
  • 2 people are willing to sell for $15 (Dan and Emily).
  • 3 people are willing to sell for $25 (Dan, Emily, and Fred).

Supply and demand match when the quantity traded is two sacks and the price is between $15 and $20. Whether Dan sells to Cathy, and Emily to Bob, or the other way round, and what precisely is the price agreed cannot be determined. This is the only limitation of this simple model. When considering the full assumptions of perfect competition the price would be fully determined since there would be enough participants to determine the price. For example, if the "last trade" was between someone willing to sell at $15.50 and someone willing to pay $15.51, then the price could be determined to the penny. As more participants enter, the more likely there will be a close bracketing of the equilibrium price.


It is important to note that this example violates the assumption of perfect competition in that there are a limited number of market participants. However this simplification shows how the equilibrium price and quantity can be determined in an easily understood situation. The results are similar when unlimited market participants and the other assumptions of perfect competition are considered.


Decision-making

Much of economics assumes that individuals seek to maximize their happiness or utility: however, whether they In philosophy, the word rationality has been used to describe numerous religious and philosophical theories, especially those concerned with truth, reason, and knowledge. Persons believing in a non-material conception of the self such as the mind or soul, understand rationality to be a key feature separating humans from animals... rationally attempt to optimize their well-being given available information is a source of much debate. In this view, which underpins much of economic writing, individuals make choices between alternatives based on their estimation of which will yield the best results. Many important economic ideas, such as the "efficient market hypothesis" rest on this view of decision making.


However, this framework, once called " Homo economicus, or Economic man, is a term used for an approximation or model of homo sapiens that acts to obtain the highest possible well-being for himself given available information about opportunities and other constraints, both natural and institutional, on his ability to achieve his predetermined goals. This approach... homo economicus" - has for decades been the focus of unease even by those who apply it. Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known primarily for his work on macroeconomics and for his advocacy of laissez-faire capitalism. In 1976 he was awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for his achievements in... Milton Friedman once defended the idea by saying that inaccurate assumptions could produce accurate results. Alfred Marshall was careful to differentiate the tendency to maximize happiness, with maximizing economic well being. The limits of rationality have been the subject of intense study, for example Herbert Simon (June 15, 1916–February 9, 2001) was a researcher in the fields of cognitive psychology, computer science, economics and philosophy (sometimes described as a polymath). He was awarded the ACMs A.M. Turing Award along with Allen Newell in 1975 for making basic contributions to artificial... Herbert Simon's model for " Many models of human behavior in the social sciences assume that humans can be reasonably approximated or described as rational entities, especially as conceived by rational choice theory. Many economics models assume that people are hyperrational, and would never do anything to violate their preferences. Herbert Simon, in Models of... bounded rationality", which was awarded a The Nobel Prizes (pronounced no-BELL or no-bell) are awarded annually to people who have done outstanding research, invented groundbreaking techniques or equipment, or made outstanding contributions to society. It is generally regarded as the supreme commendation in the world today. The prizes were instituted by the final will... Nobel Prize in Years: 1975 1976 1977 - 1978 - 1979 1980 1981 Decades: 1940s 1950s 1960s - 1970s - 1980s 1990s 2000s Centuries: 19th century - 20th century - 21st century 1978 in topic: Arts Architecture - Art - Film - Literature - Music Science and technology Aviation - Rail transport - Science - Television Other topics Canada - Sport Lists of leaders: State leaders - Religious... 1978. More recently, irrational behavior and imperfect information have increasingly been the subject of formal modelling, often referred to as behavioral economics, for which Daniel Kahneman (born 1934 in Tel Aviv, Israel) is a key pioneer and theorist of behavioral finance, which integrates economics and cognitive science to explain seemingly irrational risk management behavior in human beings. He is famous for collaboration with Amos Tversky and others in establishing a cognitive basis for common... Daniel Kahneman won a Nobel Prize in 2002 is a common year starting on Tuesday of the Gregorian calendar. It was designated: International Year of Ecotourism and Mountains National Science Year in the United Kingdom Autism Awareness Year in the United Kingdom Years: 1999 2000 2001 - 2002 - 2003 2004 2005 Decades: 1970s 1980s 1990s - 2000s - 2010s 2020s... 2002. An example is the growing field of Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. Behavioral finance and behavioral economics are closely related fields which apply scientific research on human and social cognitive and emotional biases to better... behavioral finance which combines previous theory with Cognitive psychology is the psychological science which studies cognition, the mental processes that are hypothesised to underlie behaviour. This covers a broad range of research domains, examining questions about the workings of memory, attention, perception, knowledge representation, reasoning, creativity and problem solving. Cognitive psychology is radically different from previous psychological... cognitive psychology.


The new model of information and decision making focuses on asymmetrical information, when some participants have key facts that others do not, and on decision making based, not on the economic pressures, but on the decisions of other economic actors. Asymmetrical information and behavioral dynamics lead to different conclusions: in a world of asymmetrical information, markets are generally not efficient, and inefficiences grow up as means of hedging against information. While not yet universally accepted, it is increasingly influential in policy, for example the writing of Joseph Stiglitz (born February 9, 1943) is an American economist, author and winner of Nobel Prize for economics ( 2001). He is one of the most famous contemporary economists and in addition to scholarly work he has published a number of books aimed at a general readership. He is best known... Joseph Stiglitz and financial modelling.


History of supply and demand

Attempts to determine how supply and demand interact began with This article is about the 18th-century economist. For other people of the same name, see Adam Smith (disambiguation). Adam Smith Adam Smith (1723–July 17, 1790) was a Scottish political economist and moral philosopher. His Inquiry into the Nature and Causes of the Wealth of Nations was one... Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of Adam Smith, published in 1776. It is a clearly written account of economics at the dawn of the industrial revolution. The work is broken down into five books between two volumes. The Wealth... The Wealth of Nations, first published in 1776. In this book, he mostly assumed that the supply price was fixed, but that the demand would increase or decrease as the price decreased or increased. David Ricardo David Ricardo Born April 18, 1772 Gloucestershire, London, England Died September 11, 1823 Gloucestershire, London, England David Ricardo (April 18, 1772 — September 11, 1823), a British political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists. He was... David Ricardo in 1817 published the book Principles of Political Economy and Taxation is the title of a book by David Ricardo on ecomonics. The book is an analysis that concluded land rent grows as population increases. It also clearly laid out the theory of comparative advantage, which showed that all nations could benefit from free trade... Principles of Political Economy and Taxation, in which the first idea of an economic model was proposed. In this, he more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand.


During the late 19th century the marginalist school of thought emerged. This field mainly was started by William Stanley Jevons (September 1, 1835 - August 13, 1882), English economist and logician, was born in Liverpool. He expounded in his book The Theory of Political Economy (1871) the final (marginal) utility theory of value. Jevons work, along with similar discoveries made by Carl Menger in Vienna (1871) and by... Stanley Jevons, Austrian School economist Carl Menger Carl Menger (February 23, 1840 _ February 26, 1921) was the founder of the Austrian School of economics. Menger was born in Nowy Sacz Poland (at that time Neu Sandec Austrian Galicia). He was the son of a wealthy family of minor nobility, his father... Carl Menger, and Léon Walras. The key idea was that the price was set by the most expensive price, i.e. the price at the margin. This was a substantial change from Adam Smith's thoughts on determining the supply price.


Finally, most of the basics of the modern school theory of supply and demand was finalized by Alfred Marshall Alfred Marshall (July 26, 1842 - July 13, 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. His book, Principles of Political Economy (1890) brought together the theories of supply and demand, of marginal utility and of the costs of production into... Alfred Marshall and Léon Walras when they combined the ideas about supply and the ideas about demand and began looking at the equilbrium point where the two curves crossed. They also began looking at the effect of markets on each other. Since the late 19th century, the theory of supply and demand has mainly been unchanged. Most of the work has been in examining the exceptions to the model (like oligarchy, transaction costs, non-rationality).


Criticism of Marshall's theory of supply and demand

Marshall's theory of supply and demand runs counter to the ideas of economists from Adam Smith and David Ricardo through the creation of the marginalist school of thought. Although Marshall's theories are dominant in elite universities today, not everyone has taken the fork in the road that he and the marginalists proposed. One theory counter to Marshall is that price is already known in a commodity before it reaches the market, negating his idea that some abstract market is conveying price information. The only thing the market communicates is whether or not an object is exchangable or not (in which case it would change from an object to a commodity). This would mean that the producer creates the goods without already having customers - blindly producing, hoping that someone will buy them (buy meaning exchange money for the commodities). Modern producers often have market studies prepared well in advance of production decisions, however, misallocation of factors of production can still occur.


Keynesian economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. In Keyness theory, general (macro-level) trends... Keynesian economics also runs counter to the theory of supply and demand. In Keynesian theory, prices can become "sticky" or resistant to change, especially in the case of price decreases. This leads to a market failure. Modern supporters of Keynes, such as Paul Robin Krugman (born February 28, 1953) is an American economist, who has written several books and who currently (as of 2005) is a columnist for The New York Times. Krugman is probably best known to the public as an outspoken and formidable critic of the economic and general policies... Paul Krugman, have noted this in recent history, such as when the Alternative meanings: Boston (disambiguation) The 18th-century Old State House in Boston is surrounded by tall buildings of the 19th and 20th centuries. Boston is the capital and largest city in the U.S. State of Massachusetts. It is the unofficial capital of the region known as New England. It... Boston housing market dried up in the early 1990's, with neither buyers nor sellers willing to exchange at the price equilibrium.


Categories: Stub | 1958 births | Economists ... Gregory Mankiw's work on the irrationality of actors in the markets also undermines Marshall's simplistic view of the forces involved in supply and demand.


See also

  • Consumer theory relates preferences, indifference curves and budget constraints to consumer demand curves. Contents // 1 Indifference curves and budget constraints 2 Price effects 3 Income effect 4 Substitution effect 5 See also Indifference curves and budget constraints Using indifference curves and an assumption of constant prices and a fixed income... Consumer theory
  • In economics, a deadweight loss is a permanent loss of well being to society that can occur when equilibrium for a good or service is not Pareto optimal, (that at least one individual could be made better off without others being made worse off). Deadweight loss can be thought of... Deadweight loss
  • This page deals with the various forms of economic surplus, including producer, consumer, government, and social/total surplus. For information about a budget surplus, see budget deficit. The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able... Economic surplus
  • Taxes and subsidies have the effect of shifting the quantity and price of goods. A tax on the production of goods will shift supply to the left; when other things remain equal, this will increase price paid by the consumers and decrease the price received by the producers. Subsidies will... Effect of taxes and subsidies on price
  • In economics, elasticity is the ratio of the incremental percentage change in one variable with respect to an incremental percentage change in another variable. Elasticity is usually expressed as a (positive) absolute value when the sign is already clear from context. Contents // 1 Generalised cases 2 Mathematical definition 3 Importance... Elasticity
  • An externality occurs in economics when a decision (for example, to pollute the atmosphere) causes costs or benefits to individuals or groups other than the person making the decision. In other words, the decision-maker does not bear all of the costs or reap all of the gains from his... Externality
  • Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. It considers individuals both as suppliers of labour and capital and as the ultimate consumers of the final product. On the other hand, it analyses firms both... Microeconomics
  • Rationing is the controlled distribution of resources and scarce goods or services: it restricts how much people are allowed to buy or consume. Rationing, for whatever reason, controls the size of the ration, ones allotted portion of the resources being distributed on a particular day or at a particular... Rationing
  • The term economics was coined around 1870 and popularized by Alfred Marshall, as a substitute for the earlier term political economy which has been used through the 18-19th centuries, with Adam Smith, David Ricardo and Karl Marx as its main thinkers and which today is frequently referred to as... History of economic thought
  • A supply shock is an event that suddenly changes the price of a commodity or service. It may be caused by a sudden increase or decrease in the supply of a particular good. This sudden change affects the equilibrium price. A negative supply shock (sudden supply decrease) will raise prices... Supply shock

External link and references

  • Supply and Demand (http://gutenberg.net/1/0/6/1/10612/10612-h/10612-h.htm) book by Hubert D. Henderson at Project Gutenberg.
  • Price Theory and Applications by Steven E. Landsburg ISBN 0-538-88206-9
  • An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, 1776 [1] (http://www.gutenberg.net/etext/3300)
  • By what is the price of a commodity determined?, a brief statement of Karl Marx's rival account [2] (http://www.marxists.org/archive/marx/works/1847/wage-labour/ch03.htm)

Topics in Microeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. It considers individuals both as suppliers of labour and capital and as the ultimate consumers of the final product. On the other hand, it analyses firms both... microeconomics

 (http://en.wikipedia.org/w/wiki.phtml?title=MediaWiki:Microeconomics-footer&action=edit)
Scarcity is a central concept in economics. In fact, neoclassical economics, the dominant school of economics today, defines its field as involving scarcity: following Lionel Robbins definition, it is the study of the allocation of scarce goods among competing ends. Scarcity means not having sufficient resources to produce enough to... Scarcity | Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. For example, if a city decides to build a hospital on vacant land that... Opportunity cost | Supply and demand | In economics, elasticity is the ratio of the incremental percentage change in one variable with respect to an incremental percentage change in another variable. Elasticity is usually expressed as a (positive) absolute value when the sign is already clear from context. Contents // 1 Generalised cases 2 Mathematical definition 3 Importance... Elasticity | This page deals with the various forms of economic surplus, including producer, consumer, government, and social/total surplus. For information about a budget surplus, see budget deficit. The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able... Economic surplus | The demand for various commodities by individuals are generally thought of as the outcome of a utility-maximizing process. The interpretation of this relationship between price and quantity demanded of a given good is that, given all the other goods and constraints, this set of choices is that one which... Aggregation of individual demand to total, or market, demand | Consumer theory relates preferences, indifference curves and budget constraints to consumer demand curves. Contents // 1 Indifference curves and budget constraints 2 Price effects 3 Income effect 4 Substitution effect 5 See also Indifference curves and budget constraints Using indifference curves and an assumption of constant prices and a fixed income... Consumer theory | See also: record producer. In microeconomics, production is the act of making things, in particular the act of making products that will be traded or sold commercially. Production decisions concentrate on what goods to produce, how to produce them, the costs of producing them, and optimizing the mix of resource... Production, costs, and pricing | In economics, the main criteria by which one can distinguish between different market forms are: the number and size of producers and consumers on the market, the type of goods and services being traded, and the degree to which information can flow freely. The major market forms are: Perfect competition... Market form | Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocational efficiency of a macroeconomy and the income distribution consequences associated with it. It attempts to maximize the level of social welfare by examining the economic activities of the individuals that comprise society. Welfare economics... Welfare economics | In economics, a market failure is a case in which a market fails to efficiently provide or allocate goods and services. In more general terms, market failures are situations where market forces do not serve the perceived public interest. Economists use model-like theorems to explain such cases. The two... Market failure

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