Before I move on to the next chapters of the economics textbook, I briefly want to talk about the last couple of chapters I’ve posted, which dealt with supply and demand.
These concepts are essential to all of economics, and luckily are very easy to understand.
They stem from two common-sense propositions:
- The cheaper something is, the more you’ll buy.
- The more expensive something is, the more you’ll try to sell.
Here the ‘something’ can be any good or service – apples or haircuts*, say. I’m sure your own experience will corroborate this – “buy cheap, sell dear” is a maxim much lived by.
Of course, with economics having aspirations to be a rigorous social science, we can’t leave it at the level of common sense. So we invent some fancy terms, and draws some schmancy graphs… but the basic intuition comes from our two propositions. Let’s be a bit more specific:
- When people buy things, we’ll call it demand, and when they produce and sell things we’ll call it supply.
- We’re not interested particularly in how many apples or haircuts one person buys or sells, but we are interested in how many apples or haircuts are bought and sold in the UK, say, each year**. That is, we want the market demand and market supply – which comes from totting up everyone in the market’s individual demand and supply for apples or haircuts.
- We’ll use a pair of axes, with price on the vertical axis and quantity on the horizontal axis.
Using our two common-sense propositions:
- For the demand curve, when price decreases, the quantity demanded increases (a posh way of saying ‘people like to buy more when things are cheap’). On the graph, the curve will slope downwards from the top-left to the bottom-right.
- For the supply curve, when price increases, the quantity supplied increases (posh for ‘people like to sell more when things are dear’) . On the graph, the curve will slope upwards from the bottom-left to the top-right.
Plotting both curves on our axes, we get:
This graph shows the supply and demand for a particular good or service. A couple of moments thought and you’ll understand why the graph is drawn the way it is***. As we move along the curves, we see how changes in price affect the quantities bought and sold of that good or service.
Where the demand curve and the supply curve intersect, at E, the amount that buyers of apples or cars want to buy equals the number of apples or cars that sellers want to sell. This is our equilibrium****, and we can read off from our graph what quantity of apples or cars will be bought and sold, and at what price – just read off P and Q.
I’m sorry for a very dry post, I’ll expand a bit more in a following post about how supply and demand curves can shift, due to underlying changes in the market, and how this affects the equilibrium. I will eventually move on to applying the concepts of supply and demand to help understand a contemporary political issue.
P.S. Supply and demand curves supply us with the ultimate economics chat-up line. If you find yourself fancying a female economist just ask, “Can you supply the curves I’m demanding?” (Disclaimer: The author of this post cannot vouch for the effectiveness of this chat-up line and takes no responsibility for slaps to the face or knees in the crotch.)
* I’ve used apples and haircuts as the example throughout the post, but I could equally have chosen cars, or personal tuition, or trips to Disney World. Most goods or services will obey the law of downward-sloping demand (with two exceptions) and upward-sloping supply. The shapes of the curves, their steepness and so forth, will vary though.
** This is the law of large numbers in action – no one can predict how each individual consumer or business will react to price changes. But we know that if the price of apples or haircuts go down, some consumers will buy more of them, and some producers will sell less of them as they can get less profit from doing so..
*** If you ever get confused as to whether the supply or demand curves slope up- or down-wards, I have a little trick. It’s a bit like the way my little sister puts her hands palm forwards in front of her, with her thumbs held perpendicularly to her bunched fingers, to tell left from right. I simply cross my arms in front of me, to make an ‘X’. My right arm is the downward-sloping demand curve, and the left arm the upward-sloping supply curve. Here’s a picture of Dannii Minogue figuring out a supply and demand problem:
**** Markets will not always be in equilibrium (certainly not on a macro-scale – who can doubt that who has just lived through the Great Recession!) Firms can, for a time, sell more products than people want to buy – but will soon go out of business if they do this for too long. People may, for a time, want more of a product than are being sold – but, again, how long before some enterprising soul fills the gap in the market, or the shortage of the product drives its price up enough to deter buyers?