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.

Vertical supply curve

It is sometimes the case that the supply curve is vertical: that is the quantity supplied is fixed, no matter what the market price. For example, the amount of land in the world can be considered fixed. In this case, no matter how much someone would be willing to pay for a piece of land, the extra cannot be created. Also, even if no one wanted all the land, it still would exist. These conditions create a vertical supply curve, giving it zero elasticity (i.e., no matter how large the change in price, the quantity supplied will not change).

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In the short run near vertical supply curves are even more common. For example, if the Super Bowl is next week, increasing the number of seats in the stadium is almost impossible. The supply of tickets for the game can be considered vertical in this case. If the organizers of this event underestimated demand, then it may very well be the case that the price that they set is below the equilibrium price. In this case there will likely be people who paid the lower price who only value the ticket at that price, and people who could not get tickets, even though they would be willing to pay more. If some of the people who value the tickets less sell them to people who are willing to pay more (i.e., scalp the tickets), then the effective price will rise to the equilibrium price.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The graph below illustrates a vertical supply curve. When the

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

demand 1 is in effect, the price will be p1. When

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

demand 2 is occurring, the price will be p2. Notice

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

that at both values the quantity is Q. Since the supply is fixed, any shifts in demand will only affect price.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~