A demand curve shows the inverse relationship between price and quantity demanded. The magnitude of nonprice determinants determine “where” the demand curve lies in price/quantity space.
Price Demand Quantity/time
Price Quantity/time
A supply curve shows the positive relationship between price and quantity supplied. The magnitude of nonprice determinants determine “where” the supply curve lies in price/quantity space.
Price Supply Quantity/time
Price Quantity/time
If price is above the equilibrium price. . . …then QS > QD. An excess supply (surplus) of the good occurs. Excess supply creates competition among sellers, lowering price.
If price is below the equilibrium price. . . …then QD > QS. An excess demand (shortage) for the good occurs. Excess demand creates competition among buyers, raising price.
At the equilibrium: P*, Q*. Consumer surplus equals… Producer surplus equals… The total gains from trade (economic surplus) equals…
If output is smaller… e. g. , at Q’ The total gains from trade (economic surplus) are smaller… The foregone gains from trade equal…
If output is larger… e. g. , at Q’’ The total gains from trade (economic surplus) are also smaller… Because the additional units are valued less than the foregone output elsewhere…
At the equilibrium: P*, Q*… the gains from trade are maximized. No other output level, given the conditions of demand supply will create greater social value!
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