Supply and Demand

Supply and Demand Factors
Understanding supply and demand is the underlying foundation of all economics. The term demand is used to indicate consumers’ willingness to buy while supply indicates willingness to sell. The relationship between demand and price is reflected by quantity demanded, meaning that at a certain price with everything else held constant, this is the amount people are willing to buy. The same applies for supply for quantity supplied, at a given price with all else constant this is the amount producers are willing to supply. A downward sloping line represents a demand curve, while conversely an upward line with a positive slope represents a supply curve. Movement along the curve, not to be confused with shift factors, which causes the curve to move, left and right, reflects changes in price.

Demand shift factors include taste/preference (positive), income/inferior good (positive/negative), price of substitute goods (positive), price of complementary goods (negative), expectations of future prices (positive), taxes and subsidies (negative positive) and number of consumers in the market (positive) with their respective affect on demand shifts. Supply shifts include technology (positive), prices of inputs (negative), expectations of future prices (negative), taxes and subsidies (negative, positive), and number of producers in the market (positive). Knowing these factors in relation to how they affect the equilibrium point (where quantity supplied and quantity demanded are equal) we can determine how a market economy determines prices. When supply and demand curves both change, the change in equilibrium price or quantity can be known but not both. In the following examples we can analyze how demand and supply factors affect the shifts in the demand and supply curve and how those affects change the equilibrium price or quantity.

In an article about the rise in car sales since the recession slump we can isolate factors that contribute to the...