In this lesson, we explore the economic market's laws of supply and demand and the schedules that economists create to tabulate the amount of goods demanded or supplied at certain prices across the entire economy.
Supply and Demand Schedules
Humans are pretty good at making lists. Whether it's a grocery shopping list or a list of things you need to do that day, lists can help you organize things and make a record of the myriad things sloshing about in your brain. If you're like me, without a list, you'll probably forget half of the things you have to do! And lists aren't handy just for running errands. Economists use lists to help decipher the market. In this lesson, we'll explore two such important lists, called supply schedules and demand schedules, which are lists economists make in order to quantify supply and demand.
Supply and Demand
Before we talk about the lists themselves, we should probably discuss just exactly what information we are putting in those lists! In this case, we are talking about two of the most important factors in determining the health of the economic marketplace: supply and demand.
Demand is the amount of a certain good or service consumers are willing to purchase at a given price. For example, if you or I have $4.00 to spend on apples and apples only cost $0.50, we can buy eight apples! However, if the price of apples goes up to $1.00, we can only buy four apples. In other words, in our tiny little apple-based economy, the quantity demanded has shifted from eight to four with the increase in price.
While price is the most important factor in determining demand, it is by no means the only thing. Various other factors impact demand, such as consumers substituting cheaper, similar goods for more expensive products, rises or drops in consumer income, demographics, or cultural fads and tastes. Moreover, demand for an entire national or global market usually fluctuates far more than in our example above. For example, while 200 million Americans might purchase an apple at $0.50, maybe 180 million will still purchase that apple at $1.00, but only 60 million will buy an apple at $1.50. How fast demand drops off often depends on these extra factors.
Supply, on the other hand, looks at the opposite side of the equation. Supply tells us how many of a certain good or product producers are willing to provide at a certain price. As you might expect, the higher the price of a certain good, the more of that good producers are willing to provide as that higher price begets a higher profit for the producer. For example, assuming it costs apple growers $0.05 to produce each apple each year, they are certainly going to try to produce more apples in a year when apples cost $1.00 than they are in years when apples cost $0.50; each extra apple sold would garner them an extra $0.50!
Supply, like demand, is subject to numerous external factors. Producers, especially of produce like apples, often diversify their production in multiple goods to minimize the impact of down years. In addition, supply can be affected by things like natural disasters or producers stopping production altogether and making goods scarcer.
Now that we've established the basics of supply and demand, we can talk about the lists economists make in order to quantify supply and demand. These lists are called demand schedules and supply schedules and are compiled by economists to show how much of each product the market will buy at which price and how much of each good producers are willing to provide at each price.
The difference is, rather than showing how many apples you and I want to buy or how many apples Farmer John can supply, supply and demand schedules are usually created to show how many apples the entire country or even planet is willing to buy, or how many apples all of the country's apple producers are willing to supply.
The end results usually look something like these examples. On the left, we have a fictitious demand chart for the amount of apples that the entire U.S. economy is willing to buy when apples are a certain price. As you can see, demand for apples drops off sharply with each price increase at first, while each decrease at higher price increases is smaller. After all, there will always be a small segment of the population which has to have their apples!
On the right, we have a fictitious supply chart for the amount of apples that U.S. producers are willing to provide to market at a certain price. As you can see, apple production skyrockets the higher apples are in price. These supply schedules are often then used to graph supply and demand curves - something we'll go over in detail in future lessons!
Supply and demand are important to economists' understanding of the economy. They tell us the most basic information concerning products in a capitalist system: how many goods will producers provide at a certain price and how many goods will consumers buy at a certain price. In order to understand this raw information better, economists develop tables of the supply and demand of certain products at various prices called supply and demand schedules. These schedules help to organize supply and demand information better, which can then be graphed and studied further.
Important Words From the Lesson
||the amount of a certain good or service that consumers are willing to purchase at a given price
||tells the number of a certain good or product producers are willing to provide at a certain price
|Supply & demand schedules
||schedules help to organize supply and demand information better; it can then be graphed and studied further
Study intently so that you can subsequently:
- Display understanding of supply and demand schedules and their functions
- Distinguish between supply and demand