Supply and demand

In microeconomic theory, the partial equilibrium supply and demand economic model originally developed by Alfred Marshall attempts to describe, explain, and predict changes in the price and quantity of goods sold in competitive markets. The model is only a first approximation for describing an imperfectly competitive market. 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 economic models and theories. The theory of supply and demand is important for some economic schools' understanding of a market economy in that it is an explanation of the mechanism by which many resource allocation decisions are made. However, unlike general equilibrium models, supply schedules in this partial equilibrium model are fixed by unexplained forces.

Supply curve shifts

When the suppliers' costs change the supply curve will shift. For

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example, assume that someone invents a better way of growing wheat so that the amount of wheat that can be grown for a given cost will increase.

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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

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decrease from P0 to P1. The equilibrium quantity increases

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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.

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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.

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See also: Induced demand

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