A Level Economics - Supply And Demand
Supply And Demand – Introduction
In this article we will be looking at assumptions of the demand and supply model mark equilibrium and then we’ll be finishing off with a summary.
There is a lot of talk about demand and there is a lot of talk about supply but now we’re going to start to put them together to build our demand and supply model. However as we discussed previously when we’re talking about models we’re going to have to deal with a couple of assumptions so that we can model our demand and supply together.
Let’s start off with our first assumption which is that we assume that the goods represented in the supply and demand must be identical so when we’re talking about the supply demand for a good, these goods are the same now again.
Reflection on Supply and Demand
Just in reflection we know that in reality that there are many types of cars which formulates the car market, however in economic theory we assume that all cars in the car market are identical and therefore this means that the price of all the cars will be equal as well, for the price of cars to be equal however we also assume that all consumers and producers have complete knowledge about the car they are buying or selling.
So for example everyone should be able to know about the quality of the car engine and that it’s not going to break down and this is going to be very important as if there is imperfect information in the market there will be a variety of different prices for an identical car. So if this car is slightly worse, then it could be worth less but if it’s perfectly pristine then actually it’s worth more, so then we’re breaking one of our first assumptions, which is that all the cars are identical and therefore have the same price.
Furthermore, we are simplifying a situation which is quite complicated in real life to formulate. Our model must go a little bit further and talk about our market which has producers and consumers in and it’s the collective group of all of these people that builds our market.
Supply and Demand - Our Assumption
Let’s try and build this assumption and we’re going to build it through an example first to define our assumption. Imagine someone decides to buy a hoodie as they’re going on holiday to a cold country. This means that their individual demand for hoodies has increased but what does this mean for the market? Well in the market this does not cause a market demand curve to shift outwards as his individual demand is very small in comparison to the entire market, so this is to say that each individual is very small and that their influence on the market is almost negligible.
So the market is left unaffected. However if the market moves together in the fact that everybody decides to wear a hoodie or decides to increase their demand, then we would say that the market demand curve would shift, so that leads us to our assumption which is that individual demand will not influence price and consumers and producers are there for price takers which is to say that individually we can’t move up and down our own individual demand curves.
We just have to take the price of something in the market which is a pretty good assumption seeing as an individual as much as you and I would like say the price of a new phone to go down. You and I can’t influence that price so now we get to talk about our market equilibrium, so we have seen that a market is when consumers and producers come together to exchange their goods and services at a certain price and this concept should be pretty familiar now.
Where our market is built up of our buyers and our sellers, otherwise known as our consumers and our producers, let’s build our example so first let’s talk about our consumer’s demand curve.
Well we’ve already talked about how a demand curve looks and it’s going to be this downward sloping line like this then we have our supply curve and our supply curve as we’ve already talked about is this upward sloping line that looks like that, so now that we have these two together we can put together our market to supply curve together and let’s think about why we can do that.
The reason we can do that is because they’re both using the same variables of quantity and price so our supply and demand model when we put our curves together will look like this. This is what our supply demand model is going to look like. We have both of our supply lines and our demand lines on the same graph. So what can we learn from this then?
It is the point in which the curves are going to cross which is where the quantity demanded is equal to the quantity supplied so then that means on this curve we would say where they cross the quantity demanded is equal to the quantities supplied so qd is equal to qs and this actually occurs at a very specific price which we call the price equilibrium which is also the quantity equilibrium where quantities minor quantities applied equal the same given the price equilibrium.
This is where we say that the market is in equilibrium and we say it’s an equilibrium because at this point all the goods are sold and consumed and there’s nothing left over so there’s no oversupply and there’s no under demand.
Over demand and everybody is satisfied with what they have because in the demand curve the market demand curve we’re demanding this much and the reducers are supplying that much and therefore we are consuming and demanding everything that we want and at a given price as well.
We talked about price determination when it came to exchanging in a market where for an exchange to happen a price was necessary and this is how we’ve determined our price in the market.