Supply and Demand

Alfred Marshall · 1890 · Principles of Economics, Book V

The demand curve slopes down: higher price means less quantity demanded. The supply curve slopes up: higher price means more quantity supplied. Where they cross is equilibrium: the price at which buyers want exactly what sellers offer.

The cross diagram

Marshall put price on the vertical axis and quantity on the horizontal. The intersection determines both the market price and the quantity traded.

Scheme

; Supply and demand as linear functions
; Demand: Qd = a - b*P (slopes down)
; Supply: Qs = c + d*P (slopes up)

(define (demand price) (- 100 (* 2 price)))  ; Qd = 100 - 2P
(define (supply price) (+ 0 (* 3 price)))    ; Qs = 3P

; Equilibrium: Qd = Qs
; 100 - 2P = 3P -> 100 = 5P -> P* = 20
(define p-star (/ 100 5))
(define q-star (demand p-star))

(display "Equilibrium price: ")
(display p-star)
(newline)
(display "Equilibrium quantity: ")
(display q-star)
(newline)

; Check: both curves give same Q at P*
(display "Demand at P*: ")
(display (demand p-star))
(newline)
(display "Supply at P*: ")
(display (supply p-star))

Shifts vs movements

A change in price moves you along a curve. A change in something else (income, tastes, input costs) shifts the whole curve. Demand shifts right when incomes rise. Supply shifts right when production costs fall.

Scheme

; Demand shift: income rises, demand increases
; Original: Qd = 100 - 2P
; New:      Qd = 120 - 2P (shifted right by 20)

(define (demand-original price) (- 100 (* 2 price)))
(define (demand-shifted price) (- 120 (* 2 price)))
(define (supply price) (* 3 price))

; Old equilibrium
(define p-old (/ 100 5))
(define q-old (demand-original p-old))

; New equilibrium: 120 - 2P = 3P -> P = 24
(define p-new (/ 120 5))
(define q-new (demand-shifted p-new))

(display "Old equilibrium: P=")
(display p-old)
(display ", Q=")
(display q-old)
(newline)

(display "New equilibrium: P=")
(display p-new)
(display ", Q=")
(display q-new)
(newline)

(display "Income rise -> higher price AND higher quantity")

Key terms

Term	Meaning
Demand curve	Quantity buyers want at each price (slopes down)
Supply curve	Quantity sellers offer at each price (slopes up)
Equilibrium	Price where quantity demanded equals quantity supplied
Shift	The whole curve moves (vs. movement along the curve)

Neighbors

← Division of Labor by june.kim Comparative Advantage →