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Interpreting Supply & Demand Graphs

Instructor: Ronda Jantz

Ronda has taught college Economics and has a master's degree in Economics.

Learn how to interpret economic graphs showing supply and demand curves. Explore the reasons that supply and demand curves shift in and out and how that affects price and quantity.

Interpreting a Supply and Demand Graph

To help us interpret supply and demand graphs, we're going to use a example of an organization we'll call Soap and Co., a profitable business that sells, you guessed it, soap.

The title of Soap and Co.'s supply and demand graph is called Soap. The title's location at the top of the graph tells us what good we'll be studying. Now look at the outside lines around the graph, or the axis points. It's important to first determine what is happening on each axis.

Supply and Demand
rcsoap

The y-axis (vertical line) is showing us the price of a box of soap bars. You can see in the graph that the price starts at $0 and then rises. The prices shown on the graph are dependent on the good being discussed. For instance, if we were studying the price of houses instead of soap, we would see the prices go up by thousands instead of ones.

The other axis line, also called the x-axis (looks like a horizontal line), shows the quantity of the soap. This line shows the quantity supplied and the quantity demanded depending on which curve you're reviewing. The quantity will start off at 0 items and then increase. While you would enjoy paying $0 for a box of soap bars, if you look over at the x-axis line, you soon learn that no boxes of soap bars will be offered to you at $0.

The X in the center of the graph shows lines that represent our supply curve and our demand curve.

Supply

Soap and Co. has a certain willingness to supply soap to us as consumers. They're much more willing to supply soap if the price is higher since they'll make more money. After all, if you were supplying soap, you would supply more when the prices are higher because making money is a major goal of business.

In contrast, at very low prices, most soap suppliers can't afford to provide soap to the marketplace because the opportunity for profit isn't there. Think about the input costs, or the costs of elements needed to create the product, such as glycerin, machines, colors, and scents. Can you see how the input costs can add up quickly?

Let's review our supply and demand graph to check out how Soap and Co. is going to supply at different prices. Do you see the point that shows soap at $20 a box? Well, if you draw a line from $20 over to the supply curve, you can see that Soap and Co. will only want to sell about 5 boxes of soap.

If you keep drawing that line over from $20 to the demand curve, you can see that consumers want to purchase about 15 boxes of soap at that price. That means we are demanding 10 (15 - 5 = 10) more boxes than Soap and Co. will supply. Can you see how this can create a problem in the marketplace?

There are also situations where Soap and Co. might have a shift either in or out in their supply curve, which you can see in our graph. This can be due to many things:

  • Price of inputs
  • Number of sellers
  • Advances in technology
  • Expectations
  • Taxes and subsidies
  • Government restrictions

Let's examine one of these reasons further, say number of sellers. If Soap and Co. is the only supplier of soap, they might find it hard to make all of the soap needed. If 10 more suppliers began to supply soap, what do you think might happen? Well, the amount of soap supplied would be greater, and the supply curve would shift outward. This is great for us as consumers since we'd have more options available!

Supply Graph
rcjansupply

Demand

Demand is the amount consumers purchase of Soap and Co.'s soap at a range of prices. Consumers demand more soap when the prices are lower. Do you ever feel like you're getting a good deal when you see a product at a low price? Well, this is the same situation.

Let's look at the downward sloping demand curve to see this in action. This is called an inverse relationship with price because when price is low, demand is high and when price is high, demand is low.

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