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How supply and demand work together to settle on a price that works for everyone.
Imagine you have a rare trading card. If you try to sell it for 1, everyone wants it, but you'll be sad you didn't get more money. How do you find the 'just right' price that makes everyone happy?
Think of a market like a giant game of tug-of-war. On one side, we have sellers (Supply). They want the price to be as high as possible so they can make more money. On the other side, we have buyers (Demand). They want the price to be as low as possible so they can save money. If the price is too high, sellers have a lot of items, but no one buys them. If the price is too low, everyone wants to buy, but the sellers run out of items too fast! The market price is the 'sweet spot' where the tug-of-war ends in a tie.
Let's find the market price for a cup of lemonade: 1. At per cup, you have cups ready, but people want to buy. 2. At per cup, people want to buy, but you only have cups. 3. At per cup, you have cups and exactly people want to buy. 4. Since the number of cups you have equals the number of people who want them, is the market price.
Quick Check
If a seller sets a price so high that nobody wants to buy the product, is that the market price?
Answer
No, because the market price requires both a seller willing to sell and a buyer willing to buy at that specific price.
When the amount of stuff sellers have matches the amount of stuff buyers want, we reach a state called equilibrium. In science, equilibrium means balance. In economics, it means the market is perfectly balanced! At this point, the quantity supplied () equals the quantity demanded (). We can write this simple balance as:
When this happens, there is no 'extra' stuff left over, and no 'missing' stuff that people couldn't find. Everyone who wanted to buy at that price got what they needed!
A shop has a new game. They are trying to find the equilibrium price ():
1. They try $P = \$8010020P = \. They have games, but people want them. (Too low!)
3. They try $P = \$50100100\ because and .
Quick Check
What is the economic term for the 'balance point' where supply and demand are equal?
Answer
Equilibrium.
Economists use a graph to see this balance visually. The Demand curve () usually slopes downward like a slide because people buy less when prices are high. The Supply curve () slopes upward like a hill because sellers want to sell more when prices are high. The point where these two lines cross is the Equilibrium Point (). If you look at the price () exactly at that crossing point, you have found the market price!
Imagine a sudden 'toy craze' makes the Demand () for a robot toy go way up: 1. On the graph, the Demand line moves to the right. 2. The old crossing point () is no longer where the lines meet. 3. The lines now cross at a higher point on the price axis (). 4. This tells us the new market price will be higher than before because more people are competing for the same supply.
What happens to the market when ?
On a supply and demand graph, where do you find the market price?
If the price of a toy is 'too low,' more people will want to buy it than there are toys available.
Review Tomorrow
In 24 hours, try to draw a simple 'X' graph and label the Supply line, the Demand line, and the Equilibrium point.
Practice Activity
Next time you go to the store, look at a clearance rack. Why do you think the store lowered the price? Was the original price above or below the equilibrium point?