Price Determination: Using Demand and Supply Schedules

This section focuses on understanding how equilibrium price and quantity are determined in a market using demand and supply schedules. We will analyze how the intersection of these schedules leads to market equilibrium.

Understanding Demand and Supply

Demand: The quantity of a good or service that consumers are willing and able to purchase at different prices during a specific period. The law of demand states that as price increases, quantity demanded decreases (all other factors being equal).

Supply: The quantity of a good or service that producers are willing and able to offer for sale at different prices during a specific period. The law of supply states that as price increases, quantity supplied increases (all other factors being equal).

Demand and Supply Schedules

A demand and supply schedule shows the relationship between price and quantity demanded/supplied. It's a table that illustrates these relationships.

Example: Demand and Supply Schedule for Apples

Consider the market for apples. The following table shows a sample demand and supply schedule:

Price (per kg)	Quantity Demanded (kg)	Quantity Supplied (kg)
$2.00	100	20
$2.50	90	30
$3.00	80	40
$3.50	70	50
$4.00	60	60
$4.50	50	70
$5.00	40	80

Finding Equilibrium

Equilibrium occurs where the quantity demanded equals the quantity supplied. In our example, this happens when the price is $4.00 per kg, and the quantity demanded and supplied are both 60 kg.

Equilibrium Price: The price at which quantity demanded equals quantity supplied.

Equilibrium Quantity: The quantity traded at the equilibrium price.

Graphical Representation

The demand and supply schedules can be represented graphically. The demand curve slopes downwards from left to right, and the supply curve slopes upwards from left to right. The point where the two curves intersect represents the equilibrium.

Shifts in Demand and Supply

Changes in factors other than price can shift the demand and supply curves, leading to a new equilibrium.

• Factors that shift the Demand curve: Consumer income, tastes and preferences, prices of related goods (substitutes and complements), expectations, population.
• Factors that shift the Supply curve: Input costs, technology, expectations, number of sellers, government policies (taxes and subsidies).

A shift in either the demand or supply curve will result in a new equilibrium price and quantity.

Example: Impact of a Change in Demand

Suppose there is an increase in consumer income. This will lead to an increase in demand for apples, shifting the demand curve to the right. This will result in a higher equilibrium price and a higher equilibrium quantity.

Example: Impact of a Change in Supply

Suppose the cost of fertilizer (an input in apple production) increases. This will lead to a decrease in supply, shifting the supply curve to the left. This will result in a higher equilibrium price and a lower equilibrium quantity.