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Extensive DefinitionIn economics, supply and demand describes marketrelations between prospective sellers and buyers of a good. The supply and demand modeldetermines price and quantity sold in a market. This model is fundamentalin microeconomicanalysis, and is used as a foundation for other economic models andtheories. It predicts that in a competitivemarket, price will function to equalize the quantity demandedby consumers, and the quantity supplied by producers, resulting inan economicequilibrium of price and quantity. The model incorporates otherfactors changing equilibrium as a shift of demand and/orsupply.The fundamentalsStrictly speaking, the model of supply and demandapplies to a type of market called perfectcompetition in which no single buyer or seller has much effecton prices, and prices are known. The quantity of a product suppliedby the producer and the quantity demanded by the consumer aredependent on the market priceof the product. The law of supply states that quantity supplied isrelated to price. It is often depicted as directly proportional toprice: the higher the price of the product, the more the producerwill supply, ceterisparibus ("all other things being equal"). The law of demand isnormally depicted as an inverse relation of quantity demanded andprice: the higher the price of the product, the less the consumerwill demand, ceteris paribus. The respective relations are calledthe supply curve and demand curve, or supply and demand forshort.The laws of supply and demand state that theequilibrium market price and quantity of a commodity is at the intersection of consumer demand andproducer supply. At this point, quantity supplied equals quantitydemanded (as shown in the figure ). If the price for a good isbelow equilibrium, consumers demand more of the good than producersare prepared to supply. This defines a shortage of the good. Ashortage results in producers increasing the price untilequilibrium is reached. If the price of a good is aboveequilibrium, there is a surplus of the good. Producers aremotivated to eliminate the surplus by lowering the price, untilequilibrium is reached.Supply scheduleThe supply schedule, graphicallyrepresented by the supply curve, is the relationship between marketprice and amount of goods produced. In short-runanalysis, where some input variables are fixed, a positive slopecan reflect the law of diminishingmarginal returns, which states that beyond some level ofoutput, additional units of output require larger amounts of input.In the long-run, where noinput variables are fixed, a positively-sloped supply curve canreflect diseconomiesof scale.For a given firm in a perfectlycompetitive industry, if it is more profitable to produce thanto not produce, profit is maximized by producing just enough sothat the producer's marginalcost is equal to the market price of the good.Occasionally, supply curves bend backwards. Awell known example is the backward bending supply curve of labour. Generally, as aworker's wage increases, heis willing to work longer hours, since the higher wages increasethe marginalutility of working, and the opportunitycost of not working. But when the wage reaches an extremelyhigh amount, the employee may experience the law of diminishing marginal utility. The large amount of moneyhe is making will make further money of little value to him. Thus,he will work less and less as the wage increases, choosing insteadto spend his time in leisure. The backwards-bending supply curvehas also been observed in non-labor markets, including the marketfor oil: after the skyrocketing price of oil caused by the 1973 oilcrisis, many oil-exporting countries decreased their productionof oil.The supply curve for publicutility production companies is unusual. A large portion oftheir total costs are in the form of fixed costs. The supply curvefor these firms is often constant (shown as a horizontalline).Another postulated variant of a supply curve isthat for child labor. Supply will increase as wages increase, butat a certain point a child's parents will pull the child from thechild labor force due to cultural pressures and a desire toconcentrate on education. The supply will not increase as the wageincreases, up to a point where the wage is high enough to offsetthese concerns. For a normal demand curve, this can result in twostable equilibrium points - a high wage and a low wage equilibriumpoint.Demand scheduleThe demand schedule, depicted graphicallyas the demand curve, represents the amount of goods that buyers arewilling and able to purchase at various prices, assuming all othernon-price factors remain the same. The demand curve is almostalways represented as downwards-sloping, meaning that as pricedecreases, consumers will buy more of the good.The main determinants of individual demand are:the price of the good, level of income, personal tastes, thepopulation (number of people), the government policies, the priceof substitutegoods, and the price of complementarygoods.The shape of the aggregatedemand curve can be convex or concave, possibly depending onincome distribution.As described above, the demand curve is generallydownward sloping. There may be rare examples of goods that haveupward sloping demand curves. Two different hypothetical types ofgoods with upward-sloping demand curves are a Giffen good(a sweet inferior, but staple, good)and a Veblen good(a good made more fashionable by a higher price).Changes in market equilibriumPractical uses of supply anddemand analysis often center on the different variables that changeequilibrium price and quantity, represented as shifts in therespective curves. Comparativestatics of such a shift traces the effects from the initialequilibrium to the new equilibrium.Demand curve shiftsWhen consumers increase the quantitydemanded at a given price, it is referred to as an increase indemand. Increased demand can be represented on the graph as thecurve being shifted outward. At each price point, a greaterquantity is demanded, as from the initial curve D1 to the new curveD2. More people wanting coffee is an example. In the diagram, thisraises the equilibrium price from P1 to the higher P2. This raisesthe equilibrium quantity from Q1 to the higher Q2. A movement alongthe curve is described as a "change in the quantity demanded" todistinguish it from a "change in demand," that is, a shift of thecurve. In the example above, there has been an increase in demandwhich has caused an increase in (equilibrium) quantity. Theincrease in demand could also come from changing tastes, incomes,product information, fashions, and so forth.If the demand decreases, then the oppositehappens: an inward shift of the curve. If the demand starts at D2,and decreases to D1, the price will decrease, and the quantity willdecrease. This is an effect of demand changing. The quantitysupplied at each price is the same as before the demand shift (atboth Q1 and Q2). The equilibrium quantity, price and demand aredifferent. At each point, a greater amount is demanded (when thereis a shift from D1 to D2).Supply curve shiftsWhen the suppliers' costs change for agiven output, the supply curve shifts in the same direction. Forexample, assume that someone invents a better way of growingwheat so that the cost ofwheat that can be grown for a given quantity will decrease.Otherwise stated, producers will be willing to supply more wheat atevery price and this shifts the supply curve S1 outward, toS2 an increase in supply. This increase in supply causesthe equilibrium price to decrease from P1 to P2. The equilibriumquantity increases from Q1 to Q2 as the quantity demanded increasesat the new lower prices. In a supply curve shift, the price and thequantity move in opposite directions. If the quantity supplieddecreases at a given price, the opposite happens. If the supplycurve starts at S2, and shifts inward to S1, the equilibrium pricewill increase, and the quantity will decrease. This is an effect ofsupply changing. The quantity demanded at each price is the same asbefore the supply shift (at both Q1 and Q2). The equilibriumquantity, price and supply changed.When there is a change in supply or demand, thereare four possible movements. The demand curve can move inward oroutward. The supply curve can also move inward or outward.See also: InduceddemandElasticityA very important concept in understanding supplyand demand theory is elasticity. In this context, it refers to howsupply and demand respond to various factors. One way to defineelasticity is the percentage change in one variable divided by thepercentage change in another variable (known as arc elasticity,which calculates the elasticity over a range of values, in contrastwith point elasticity, which uses differential calculus todetermine the elasticity at a specific point). It is a measure ofrelative changes.Often, it is useful to know how the quantitydemanded or supplied will change when the price changes. This isknown as the price elasticity of demand and the price elasticity of supply. If a monopolist decides to increasethe price of their product, how will this affect their salesrevenue? Will the increased unit price offset the likely decreasein sales volume? If a government imposes a tax on a good, thereby increasingthe effective price, how will this affect the quantitydemanded?Another distinguishing feature of elasticity isthat it is more than just the slope of the function. For example, aline with a constant slope will have different elasticity atvarious points. Therefore, the measure of elasticity is independentof arbitrary units (such as gallons vs. quarts, say for theresponse of quantity demanded of milk to a change in price),whereas the measure of slope only is not.One way of calculating elasticity is thepercentage change in quantity over the associated percentage changein price. For example, if the price moves from $1.00 to $1.05, andthe quantity supplied goes from 100 pens to 102 pens, the slope is2/0.05 or 40 pens per dollar. Since the elasticity depends on thepercentages, the quantity of pens increased by 2%, and the priceincreased by 5%, so the price elasticity of supply is 2/5 orSince the changes are in percentages, changingthe unit of measurement or the currency will not affect theelasticity. If the quantity demanded or supplied changes a lot whenthe price changes a little, it is said to be elastic. If thequantity changes little when the prices changes a lot, it is saidto be inelastic. An example of perfectly inelastic supply, or zeroelasticity, is represented as a vertical supply curve. (See that section below)Elasticity in relation to variables other thanprice can also be considered. One of the most common to consider isincome. How would thedemand for a good change if income increased or decreased? This isknown as the income elasticity of demand. For example, how much would thedemand for a luxury car increase if averageincome increased by 10%? If it is positive, this increase in demandwould be represented on a graph by a positive shift in the demandcurve. At all price levels, more luxury cars would bedemanded.Another elasticity sometimes considered is thecross elasticity of demand, which measures the responsivenessof the quantity demanded of a good to a change in the price ofanother good. This is often considered when looking at the relativechanges in demand when studying complementand substitutegoods. Complement goods are goods that are typically utilizedtogether, where if one is consumed, usually the other is also.Substitute goods are those where one can be substituted for theother, and if the price of one good rises, one may purchase less ofit and instead purchase its substitute.Cross elasticity of demand is measured as thepercentage change in demand for the first good that occurs inresponse to a percentage change in price of the second good. For anexample with a complement good, if, in response to a 10% increasein the price of fuel, the quantity of new cars demanded decreasedby 20%, the cross elasticity of demand would be -2.0.Vertical supply curve (Perfectly Inelastic Supply)It is sometimes the case that a supply curve isvertical: that is the quantity supplied is fixed, no matter whatthe market price. For example, the surface area or land ofthe world is fixed. No matter how much someone would be willing topay for an additional piece, the extra cannot be created. Also,even if no one wanted all the land, it still would exist. Landtherefore has a vertical supply curve, giving it zero elasticity(i.e., no matter how large the change in price, the quantitysupplied will not change).Supply-sideeconomics argues that the aggregate supply function – the totalsupply function of the entire economy of a country – is relativelyvertical. Thus, supply-siders argue against government stimulationof demand, which would only lead to inflation with a verticalsupply curve.Other marketsThe model of supply and demand also appliesto various specialty markets.The model applies to wages, which are determined by themarket for labor.The typical roles of supplier and consumer are reversed. Thesuppliers are individuals, who try to sell their labor for thehighest price. The consumers of labors are businesses, which try tobuy the type of labor they need at the lowest price. Theequilibrium price for a certain type of labor is the wage.The model applies to interest rates, which are determined by the moneymarket. In the short term, the money supplyis a vertical supply curve, which the central bankof a country can control through monetarypolicy. The demand for money intersects with the money supplyto determine the interest rate.Other market formsThe supply and demand model is used toexplain the behavior of perfectly competitive markets, but itsusefulness as a standard of performance extends to other types ofmarkets. In such markets, there may be no supply curve, such asabove, except by analogy. Rather, the supplier or suppliers aremodeled as interacting with demand to determine price and quantity.In particular, the decisions of the buyers and sellers areinterdependent in a way different from a perfectly competitivemarket.A monopoly is the case of asingle supplier that can adjust the supply or price of a good atwill. The profit-maximizing monopolist is modeled as adjusting theprice so that its profit is maximized given the amount that isdemanded at that price. This price will be higher than in acompetitive market. A similar analysis can be applied when a goodhas a single buyer, a monopsony, but many sellers.Oligopolyis a market with so few suppliers that they must take account oftheir actions on the market price or each other. Game theorymay be used to analyze such a market.The supply curve does not have to be linear.However, if the supply is from a profit-maximizing firm, it can beproven that curves-downward sloping supply curves (i.e., a pricedecrease increasing the quantity supplied) are inconsistent withperfect competition in equilibrium. Then supply curves fromprofit-maximizing firms can be vertical, horizontal or upwardsloping.Positively-sloped demand curves?Standard microeconomicassumptions cannot be used to disprove the existence ofupward-sloping demand curves. However, despite years of searching,no generally agreed upon example of a good that has anupward-sloping demand curve (also known as a Giffen good)has been found. Some suggest that luxury cosmetics can beclassified as a Giffen good. As the price of a high end luxurycosmetic drops, consumers see it as an low quality good compared toits peers. The price drop may indicate lower quality ingredients,thus consumers would not want to apply such an inferior product totheir face.Lay economists sometimes believe that certaincommon goods have an upward-sloping curve. For example, people willsometimes buy a prestige good (eg. a luxury car) because it isexpensive, a drop in price may actually reduce demand. However, inthis case, the good purchased is actually prestige,and not the car itself. So, when the price of the luxury cardecreases, it is actually decreasing the amount of prestigeassociated with the good (see also Veblen good).However, even with downward-sloping demand curves, it is possiblethat an increase in income may lead to a decrease in demand for aparticular good, probably due to the existence of more attractivealternatives which become affordable: a good with this property isknown as an inferiorgood.Negatively-sloped supply curveThere are cases where theprice of goods gets cheaper, but more of those goods are produced.This is usually related to economiesof scale and massproduction. One special case is computersoftware where creating the first instance of a given computerprogram has a high cost, but the marginal cost of copying thisprogram and distributing it to many consumers is low (almostzero).Empirical estimationDemand and supply relations in amarket can be statistically estimated from price, quantity, andother data with sufficientinformation in the model. This can be done with simultaneous-equation methods of estimation in econometrics. Such methodsallow solving for the model-relevant "structural coefficients," theestimated algebraic counterparts of the theory. The Parameteridentification problem is a common issue in "structuralestimation." Typically, data on exogenous variables (that is,variables other than price and quantity, both of which are endogenousvariables) are needed to perform such an estimation. An alternativeto "structural estimation" is reduced-formestimation, which regresses each of the endogenous variables on therespective exogenous variables.Macroeconomic uses of demand and supplyDemand and supplyhave also been generalized to explain macroeconomic variables ina marketeconomy, including the quantity of totaloutput and the general price level.The AggregateDemand-Aggregate Supply model may be the most directapplication of supply and demand to macroeconomics, but othermacroeconomic models also use supply and demand. Compared tomicroeconomic usesof demand and supply, different (and more controversial)theoretical considerations apply to such macroeconomic counterpartsas aggregatedemand and aggregatesupply. Demand and supply may also be used in macroeconomictheory to relate money supplyto demand and interestrates.Demand shortfallsA demandshortfall results from the actual demand for a given productbeing lower than the projected, or estimated, demand for thatproduct. Demand shortfalls are caused by demand overestimation inthe planning of new products. Demand overestimation is caused byoptimismbias and/or strategicmisrepresentation.HistoryThe phrase "supply and demand" was first used byJamesDenham-Steuart in his Inquiry into the Principles of Political Economy, published in1767. AdamSmith used the phrase in his 1776 book TheWealth of Nations, and DavidRicardo titled one chapter of his 1817 work Principles of Political Economy and Taxation "On the Influenceof Demand and Supply on Price".In The Wealth of Nations, Smith generally assumedthat the supply price was fixed but that its "merit" (value) woulddecrease as its "scarcity" increased, in effect what was latercalled the law of demand. Ricardo, in Principles of PoliticalEconomy and Taxation, more rigorously laid down the idea of theassumptions that were used to build his ideas of supply and demand.AntoineAugustin Cournot first developed a mathematical model of supplyand demand in his 1838 Researches on the Mathematical Principles of the Theory ofWealth.During the late 19th century the marginalistschool of thought emerged. This field mainly was started byStanley Jevons, Carl Menger,and LéonWalras. The key idea was that the price was set by the mostexpensive price, that is, the price at the margin. This was asubstantial change from Adam Smith's thoughts on determining thesupply price.In his 1870 essay "On the GraphicalRepresentation of Supply and Demand", FleemingJenkin drew for the first time the popular graphic of supplyand demand which, through Marshall, eventually would turn into themost famous graphic in economics.The model was further developed and popularizedby AlfredMarshall in the 1890 textbook Principles of Economics. Alongwith LéonWalras, Marshall looked at the equilibrium point where the twocurves crossed. They also began looking at the effect of markets oneach other.See alsoAggregatedemandAggregatesupplyArtificialdemandBarriersto entryConsumersurplusConsumertheoryDeadweightlossDemandshortfallEconomicsurplusEffect of taxes and subsidies on priceElasticityExternalityFoundations of Economic Analysis by Paul A. SamuelsonHistory of economic thought"invisiblehand"LaborshortageMicroeconomicsProducer'ssurplusProtectionismProfitRationingReal prices and ideal pricesSay'sLawSupply shockAnInquiry into the Nature and Causes of the Wealth of Nations byAdam SmithReferencesExternal linksNobelpricewinnerProf. William Vickrey: 15 fatal fallacies of financialfundamentalism-A Disquisition on Demand SideEconomics"Marshallian Cross Diagrams and Their Uses before Alfred Marshall:The Origins of Supply and Demand Geometry" by ThomasHumphrey (via the Richmond Fed)Supply andDemand book by HubertD. Henderson at Project Gutenberg.Price Theory and Applications by Steven E. Landsburg ISBN0-538-88206-9An Inquiry into the Nature and Causes of the Wealth of Nations,AdamSmith, 1776 http://www.gutenberg.net/etext/3300By what is the price of a commodity determined?, a briefstatement of Karl Marx'srival account http://www.marxists.org/archive/marx/works/1847/wage-labour/ch03.htmThe Economic Motivation of Open Source Software: StakeholderPerspectives, Dirk Riehle,2007 http://www.riehle.org/computer-science/research/2007/computer-2007-article.htmlSupply andDemand by Fiona Maclachlan and BasicSupply and Demand by Mark Gillis, The Wolfram Demonstrations Project.oversupply in Arabic: عرض و طلبoversupply in Persian: عرضه و تقاضاoversupply in Bulgarian: Търсене ипредлаганеoversupply in Danish: Udbud ogefterspørgseloversupply in German: Marktgleichgewichtoversupply in Spanish: Oferta y demandaoversupply in Esperanto: Mendado kajofertadooversupply in French: Offre et demandeoversupply in Korean: 수요와 공급oversupply in Croatian: Potražnjaoversupply in Croatian: Ponudaoversupply in Indonesian: Penawaran danpermintaanoversupply in Icelandic: Framboð ogeftirspurnoversupply in Italian: Domanda e offertaoversupply in Hebrew: היצע וביקושoversupply in Lao: ການສະໜອງ ແລະຄວາມຕ້ອງການoversupply in Malay (macrolanguage): Bekalan dankeperluanoversupply in Dutch: Vraag en aanbodoversupply in Japanese: 需要と供給oversupply in Polish: Popytoversupply in Portuguese: Lei da oferta e daprocuraoversupply in Simple English: Quantitydemandedoversupply in Romanian: Cerere şi ofertăoversupply in Slovak: Ponukaoversupply in Slovenian: Ponudba inpovpraševanjeoversupply in Finnish: Kysyntä ja tarjontaoversupply in Swedish: Utbud ochefterfråganoversupply in Thai: อุปสงค์และอุปทานoversupply in Ukrainian: Попит тапропозиціяoversupply in Urdu: رسدoversupply in Vietnamese: Nguyên lý cung -oversupply in Chinese: 供给和需求Synonyms, Antonyms and RelatedWordsavalanche, balance, be prodigal with,bonus, deluge, dividend, embarras derichesses, engulf,enough, extra, extravagance, extravagancy, flood, flood the market, gratuity, inundate, inundation, lagniappe, landslide, lavishness, leftover, margin, money to burn, more thanenough, overabundance, overaccumulation,overage, overbounteousness,overcopiousness,overdose, overequip, overfurnish, overlavish, overlavishness, overluxuriance, overmeasure, overmuchness, overnumerousness,overplentifulness,overplenty, overplus, overpopulation, overprofusion, overprovender, overprovide, overprovision, overrun, oversell, overset, overstock, oversufficiency,overwhelm, plenty, plethora, plus, pourboire, prodigality, redundancy, remainder, something extra,spare, spate, superabundance, superflux, surplus, surplusage, swamp, tip, whelm

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