Supply & Demand Market SimulatorChapter 4: The Market Forces of Supply and Demand

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Equilibrium Price
$3.00
Equilibrium Quantity
15
Current Price
$3.00
Market Status
Equilibrium
The market for lattes

Market price

The price settles where quantity demanded equals quantity supplied. Switch to "Set the price yourself" to create a surplus or shortage and see how the market pushes the price back.

Demand shifters (buyers)

-120+12
-120+12
This good is:
-120+12
-120+12
-120+12
-120+12

Supply shifters (sellers)

-120+12
-120+12
-120+12
-120+12

Slider values are in units of the good (lattes) added to or removed from quantity at every price. The chapter's example shifts curves by 5.

What's happening?

Active Learning scenarios from the chapter

Click a scenario. The simulator sets the sliders and explains the three-step method: which curve shifts, which direction, and what happens to price and quantity.

Practice quiz: questions from Chapter 4

Each round gives you 10 random questions. After you answer, use Show on graph to see the scenario in the simulator and check the answer visually.

Chapter 4 in brief

Five questions the chapter answers: What affects buyers' demand? What affects sellers' supply? How do supply and demand set price and quantity? How do changes in those factors change price and quantity? How do markets allocate resources?

Markets and competition
A market is a group of buyers and sellers of a particular good or service. Buyers as a group determine demand; sellers as a group determine supply. A competitive market has many buyers and sellers, each with a negligible effect on price. In a perfectly competitive market all goods are identical and everyone is a price taker.
Demand: law of demand, schedule, curve
Quantity demanded is the amount buyers are willing and able to purchase. Law of demand: other things equal, when price rises, quantity demanded falls. A demand schedule is a table; a demand curve is the graph (price on the vertical axis, quantity on the horizontal).
PriceSamDeanMarket QD
$016824
$114721
$212618
$310515
$48412
$5639
$6426
Market demand is the sum of all individual demands: add the quantities at each price (a horizontal sum). In the simulator, market demand is QD = 24 − 3P.
Demand curve shifters (non-price determinants)
A change in the good's own price moves you along the curve. A change in anything else shifts the whole curve:
  • Number of buyers: more buyers, demand shifts right.
  • Income: for a normal good (laptops, branded clothes) higher income raises demand; for an inferior good (instant ramen, fake watches) higher income lowers demand.
  • Prices of substitutes (pizza and hamburgers, Coke and Pepsi, CDs and downloads): a higher price of one raises demand for the other.
  • Prices of complements (computers and software, bagels and cream cheese, milk and coffee): a higher price of one lowers demand for the other.
  • Tastes: the Atkins diet raised demand for eggs; veganism lowers demand for meat.
  • Expectations: expecting higher income or higher prices raises demand now.
Rule of thumb: if the changing variable is on an axis (price), move along the curve; if it is not on an axis, the curve shifts.
Supply: law of supply, schedule, curve
Quantity supplied is the amount sellers are willing and able to sell. Law of supply: other things equal, when price rises, quantity supplied rises.
PriceStarbucksPeet'sMarket QS
$0000
$1325
$26410
$39615
$412820
$5151025
$6181230
Market supply is the horizontal sum of individual supplies. In the simulator, market supply is QS = 5P.
Supply curve shifters (non-price determinants)
  • Input prices (wages, raw materials): supply is negatively related to input prices. Cheaper milk shifts latte supply right.
  • Technology: a cost-saving improvement works like a fall in input prices and shifts supply right.
  • Number of sellers: more sellers, supply shifts right.
  • Expectations: if sellers of a storable good (oil) expect higher prices, they hold inventory back and current supply shifts left.
Equilibrium, surplus and shortage
Equilibrium is where the curves intersect: quantity supplied equals quantity demanded. In the latte market that is $3 and 15 lattes.
  • Surplus (excess supply): QS > QD. At $5, QD = 9 and QS = 25, a surplus of 16. Sellers cut prices, QD rises, QS falls, until equilibrium.
  • Shortage (excess demand): QD > QS. At $1, QD = 21 and QS = 5, a shortage of 16. Sellers raise prices, QD falls, QS rises, until equilibrium.
Shift vs. movement along a curve
Change in demand / supply = a shift of the curve, caused by a non-price determinant.
Change in quantity demanded / supplied = a movement along a fixed curve, caused by a change in the good's own price.
Three steps for analyzing a change in equilibrium
  1. Decide whether the event shifts supply, demand, or both.
  2. Decide whether the curve shifts right or left.
  3. Use the diagram to compare the old and new equilibrium.
EventPriceQuantity
Demand uprisesrises
Demand downfallsfalls
Supply upfallsrises
Supply downrisesfalls
Both upambiguousrises
Both downambiguousfalls
Demand up, supply downrisesambiguous
Demand down, supply upfallsambiguous
Electric cars example: higher gas prices shift demand right (P and Q rise); cheaper technology shifts supply right (P falls, Q rises); both together raise Q while the effect on P depends on which shift is bigger.
How prices allocate resources
In market economies, prices adjust to balance supply and demand. Those equilibrium prices are the signals that guide economic decisions and allocate scarce resources. "Markets are usually a good way to organize economic activity."