The law of demand is the negative relationship between consumer demand and price. The law of supply is the positive relationship between producer supply and price. The actual price is determined by how the demand and supply curve in a given market interact. Let’s see how your demand curve and my supply curve for rice interact.
As a reminder: according to your demand curve, for 600 grains of rice, you want to pay at most 1 cent per grain. For 500, you’ll pay at most 2 cents per grain. For 400, you’ll pay at most 3 cents per grain.
According to my supply curve, to make 250 grains of rice, I want at least 1 cent per grain. To make 500, I want at least 2 cents per grain. To make 750, I want at least 3 cents per grain.
So what price will we agree on? Let’s draw out our curves to see where we meet.
Hmm, at one cent, I’ll be supplying 250 grains of rice, and you’ll be demanding 600. You’re gonna complain about the shortage, and I will thus want to make more rice.
At 3 cents, I’m willing to supply 750 grains of rice, and you’re willing to buy only 400. I’m gonna complain about there being a surplus of rice, and will thus make less rice.
If I however supply 500 grains for 2 cents per grain, you’ll demand 500 grains for 2 cents per grain. There would be neither a shortage nor a surplus. This would be where supply and demand intersect, where the quantity consumers are willing to buy is equal to the quantity producers are willing to sell, at one agreed-upon price. This is equilibrium. 2 cents is our equilibrium price, and 500 grains is our equilibrium quantity.
Shifts in demand and supply will change equilibrium price and quantity.
If demand shifts to the right (because of an increase in preferences), then:
If demand shifts to the left (because of a reduction in preferences), then:
If supply shifts to the right (because of a reduction in costs), then:
If supply shifts to the left (because of an increase in costs), then:
Well look at that: in addition to knowing what causes shifts in supply and demand in any given market, you know how these shifts can change equilibrium price and quantity. You’re officially a basic expert of economics.
I believe the biggest tragedy of capitalism is that I can’t force you to buy my rice at the price I want. A lesser tragedy is that you can’t force me to sell you my rice at the price you want. We can’t directly force each other to do anything in capitalism. :[ The only reason we had a transaction was because there was a price we could agree on.
But this isn’t the case in every market. Sometimes supply and demand never meet, so there is no possible-price that would lead to a transaction.
This happens when the price producers are willing to sell at is always higher than the price consumers are willing to pay. For example, when you sell organic food in a low-income neighborhood where nobody can afford it, it’s unlikely that you’ll get any customers. Another example: if you have the blueprints for a galaxy travel machine that costs a cajillion dollars to produce, and that nobody will pay you to make, it’s unlikely that humanity will have your galaxy travel machine. For a market to exist, costs need to be low enough and willingness to buy need to be high enough.
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