Demand refers to the quantity of goods or services that are demanded by consumers in the market and it is determined by price as well as other factors including, the consumers’ purchasing power and price of related goods. Supply is the quantity of goods or services that a firm is willing to supply to the market and it is determined by price and other factors such as the costs of producing the goods or services. The market equilibrium is referred to the price and quantity at which goods and services are bought and sold in a market. It is determined by the interaction between the demand curve of the consumers and firm’s supply curve (Mendes et al. 156). This essay provides an illustration of the demand and supply curve as well as how they help in determining the market equilibrium.
The figure below will be used to illustrate the demand and supply curve using an example of Cornmarket in the United States in 1996. The horizontal axis shows the total quantity of corn that was supplied and demanded in the market. The vertical axis shows the price at which corn was sold in the market. The curve D in the diagram is the market demand curve for the product and it depicts the quantity at which buyers are willing to buy corn at different prices.
| Excess Supply |
| Excess Demand |
| 3.000 |
| 4.000 |
| 1.1 |
| 1.5 |
| 2 |
| Price (dollars per bushel)
|
| Quantity (billions of bushels per year) |
| 5.000 |
| S |
| E |
| D |
The demand curve can be interpreted in two ways. Firstly, the demand function or horizontal interpretation that is presented as Qd = F (P). The interpretation starts by reading the price on the vertical axis and then reading the corresponding quantity demanded on the horizontal axis. The other interpretation is inverse demand function or vertical interpretation, which is presented as P = F (Qd). A demand curve is downward sloping and the law of demand dictates that as the price of products falls; the demand increases (Mendes et al. 159). On the side of a firm, the supply curve is used to analyze the quantity demanded of corn. The law of supply dictates that as the price of a product increases, firms will be willing to supply more of the product to the market. More suppliers will also be willing to offer the same product for sale. The supply curve can also be interpreted through horizontal or vertical interpretation. The horizontal interpretation or supply function presented as QS = F (P) starts with the price before moving to the supply curve to read the quantity that firms wish to offer. The vertical interpretation or Inverse Supply function, which is presented as P= F (QS), begins with the quantity before reading the marginal cost that corresponds on the vertical axis (Mendes et al. 161).
The demand and supply curve can be used to describe the equilibrium quantity and price of corn. The equilibrium price or market-clearing price refers to the price that matches the quantity demand and supplied. The equilibrium quantity is the quantity that is bought and sold at the equilibrium price. The equilibrium price was 4.00 as shown in the figure. Setting prices above the equilibrium lead to excess supply. When Qs = 2 and Qd = 1.1, the surplus is 0.9 billion bushels of corn. If prices are set below the equilibrium, it results in excess demand. When Qs = 1.1 and Qd =2, it results in a shortage of 0.9 billion bushels of corn.
Work Cited
Mendes, P., Jr., J. E. Leal, and A. M. T. Thome. “A Maturity Model for Demand-Driven Supply Chains in the Consumer Product Goods Industry.” International Journal of Production Economics vol. 179, 2016, pp. 153-165. FSTA – Food Science and Technology Abstracts. Web. 11 Feb. 2017.