Supply and Demand

CHAPTER 4 – SUPPLY AND DEMAND

DEMAND
A behavioral description of the amount of a good that consumers as a group will buy at each and every price, if that price should prevail, other things equal (constant).

Demand is an inverse relationship. The word "Demand" references the entire schedule of prices and quantities that is being described: the "behavioral description" of buyer behavior. The word "Demand" refers to the entire graph, in other words, the entire relationship of prices and quantities being sought for purchase.

A particular point on a demand curve refers to a specific total quantity sought for purchase at a specific price. That specific price is associated, therefore, with a specific amount demanded. We don’t say, "Well, demand is so-and-so at a price of $5"; rather, we say, "The amount demanded is so-and-so at a price of $5." Why? Because the word "Demand" is associated with the entire curve, the entire relationship.

Demand is utility-related. It refers to the price that will be necessary to call forth the next purchase by the next buyer – the marginal buyer. The next buyer will not buy unless he or she can justify the purchase price in terms of the marginal utility that the good gives him or her.

Of course, we are referring to only one among many demand curves, because there are many independent influences on the amount of a good that consumers will buy: not only the product’s own price, but also:

The prices of goods related to each other in consumption
Consumer income
Tastes and preferences of consumers
Expectations (by consumers) as to future prices and availabilities
The number of buyers – "the size of the market"

SUPPLY
A behavioral description of the amount of a good that producers as a group will produce and sell at each and every price, if that price should prevail, other things equal (constant).

Supply is a direct relationship. The word "Supply" references the entire schedule of prices and quantities that is being described: the "behavioral description" of seller (producer) behavior. The word "Supply" refers to the entire graph, in other words, the entire relationship of prices and quantities being offered for sale.

A particular point on a supply curve refers to a specific total quantity offered for sale at a specific price. That specific price is associated, therefore, with a specific amount supplied. We don’t say, "Well, supply is so-and-so at a price of $5"; rather, we say, "The amount supplied is so-and-so at a price of $5." Why? Because the word "Supply" is associated with the entire curve, the entire relationship.

Supply is cost-related. It refers to the price that will be necessary to call forth the next unit of production by the next producer – the marginal producer. The next producer (seller) will not offer for sale unless he or she can justify the sale on a comparison of the specific price covering the cost of production for that unit produced.

Of course, we are referring to only one among many supply curves, because there are many independent influences on the amount of a good that producers will produce and offer for sale: not only the product’s own price, but also:

The price of goods related in production The price of inputs to production (resources)
The productivity of inputs in producing the good (including technology)
Expectations (by producers) of future prices and availabilities
The number of producers in the market

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This page was last updated on Friday, July 21, 2006.