Key Concepts of Supply Demand Graphs

Supply and demand graphs are essential in understanding how markets work. They show how prices and quantities adjust based on shifts in supply and demand, helping us grasp concepts like equilibrium, surpluses, and consumer and producer welfare in AP Microeconomics.

1. Basic supply and demand graph

   • The graph consists of two curves: the demand curve (downward sloping) and the supply curve (upward sloping).
   • The intersection of the two curves represents the market equilibrium, where quantity supplied equals quantity demanded.
   • The vertical axis represents price, while the horizontal axis represents quantity.

2. Shifts in supply curve

   • A rightward shift indicates an increase in supply, often due to lower production costs or technological advancements.
   • A leftward shift indicates a decrease in supply, often due to higher production costs or natural disasters.
   • Shifts in the supply curve affect the equilibrium price and quantity in the market.

3. Shifts in demand curve

   • A rightward shift indicates an increase in demand, often due to higher consumer income or changes in consumer preferences.
   • A leftward shift indicates a decrease in demand, often due to a decrease in consumer income or the availability of substitutes.
   • Shifts in the demand curve also impact the equilibrium price and quantity.

4. Equilibrium price and quantity

   • Equilibrium price is the price at which the quantity demanded equals the quantity supplied.
   • Equilibrium quantity is the amount of goods sold at the equilibrium price.
   • Changes in supply or demand can lead to new equilibrium prices and quantities.

5. Consumer and producer surplus

   • Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
   • Producer surplus is the difference between what producers are willing to accept and what they actually receive.
   • Both surpluses measure the economic welfare and efficiency of a market.

6. Price ceilings and floors

   • A price ceiling is a maximum price set by the government, leading to potential shortages if set below equilibrium.
   • A price floor is a minimum price set by the government, leading to potential surpluses if set above equilibrium.
   • Both can distort market equilibrium and affect supply and demand.

7. Tax incidence

   • Tax incidence refers to the distribution of the tax burden between consumers and producers.
   • The more inelastic the demand or supply, the greater the burden on that side of the market.
   • Understanding tax incidence helps analyze the effects of taxation on market outcomes.

8. Elasticity of supply and demand

   • Elasticity measures how responsive quantity demanded or supplied is to changes in price.
   • Demand is elastic if a small price change leads to a large change in quantity demanded; inelastic if the opposite is true.
   • Supply elasticity indicates how quickly producers can respond to price changes.

9. Shortage and surplus

   • A shortage occurs when quantity demanded exceeds quantity supplied at a given price, often leading to upward pressure on prices.
   • A surplus occurs when quantity supplied exceeds quantity demanded, often leading to downward pressure on prices.
   • Both conditions indicate a market imbalance that can lead to adjustments in price and quantity.

10. Changes in market equilibrium

    • Changes in external factors (like consumer preferences, technology, or government policies) can shift supply and demand curves.
    • New equilibriums are established as the market adjusts to these changes.
    • Understanding these changes is crucial for predicting market behavior and outcomes.