Simple Economics on the Web
Your handy guide to economics
The intersection of the demand curve and supply curve is the market equilibrium. At this price, the quantity suppliers want to produce equals the quantity consumers want to purchase. This equality is what makes the point an equilibrium – neither consumers nor producers have reason to change their behavior. If we tried to set the price 20 percent higher, consumers would cut back on what they bought and suppliers would increase what they produced. The result would be inventories piling up – for example, unsold cars on dealer’s lots – a situation that would lead to lower prices and cutbacks in production, changes in behavior that help to move the market back to equilibrium.
Using this graph, you can explore how different developments change the market. Suppose, for example, that the diagram represents the market for personal computers.
Question 1: How will this market be affected by a fall in the price of DRAM, the memory modules that are contained in all computers?
Question 2: How does the elasticity of demand for personal computers affect your answer to Question 1?
Make up one or two similar questions and use the tools to explore the answers.