[{"data":1,"prerenderedAt":1409},["ShallowReactive",2],{"article:\u002Farticles\u002Fsupply-and-demand-explained":3},{"article":4,"related":1394},{"id":5,"title":6,"author":7,"body":8,"category":1380,"description":1381,"extension":1382,"kind":1383,"meta":1384,"navigation":1385,"path":1386,"publishedAt":1387,"readingTime":1388,"reviewer":1389,"seo":1390,"stem":1391,"trending":1392,"updatedAt":1387,"__hash__":1393},"articles\u002Farticles\u002Fsupply-and-demand-explained.md","Supply and Demand: How Markets Set Prices","Lynktor Editorial Team",{"type":9,"value":10,"toc":1363},"minimark",[11,16,25,28,32,42,45,61,68,72,82,89,93,96,119,125,454,666,669,676,679,685,689,692,716,719,724,756,760,792,1022,1083,1086,1090,1097,1242,1256,1259,1262,1266,1269,1283,1286,1290,1293,1323,1326,1330,1350],[12,13,15],"h2",{"id":14},"why-this-idea-comes-first","Why this idea comes first",[17,18,19,20,24],"p",{},"Economics begins with a simple fact: resources are scarce. There is only so much land, labor, time, and raw material, and people want more than can be produced. Every society needs some way to decide who gets what. In a market economy, most of that work is done by ",[21,22,23],"strong",{},"prices",", and prices are set by supply and demand.",[17,26,27],{},"Once you understand supply and demand, a surprising number of headlines start to make sense: why gasoline jumps before a holiday weekend, why concert tickets resell for triple their face value, why a bumper harvest can hurt farmers, and why rents climb in cities where few new homes are built.",[12,29,31],{"id":30},"demand-what-buyers-are-willing-to-pay","Demand: what buyers are willing to pay",[17,33,34,37,38,41],{},[21,35,36],{},"Demand"," describes how much of something people want to buy at each possible price, over a given period. The key pattern is called the ",[21,39,40],{},"law of demand",": when the price of a good rises, people buy less of it, and when the price falls, they buy more, assuming nothing else changes.",[17,43,44],{},"There are two reasons for this:",[46,47,48,55],"ul",{},[49,50,51,54],"li",{},[21,52,53],{},"The substitution effect."," When coffee gets more expensive, some people switch to tea. A higher price makes alternatives look relatively cheaper.",[49,56,57,60],{},[21,58,59],{},"The income effect."," A higher price means your money stretches less far. Even if you do not switch, you can afford fewer cups.",[17,62,63,64,67],{},"Economists draw this as a downward-sloping ",[21,65,66],{},"demand curve",": price on one axis, quantity on the other. Each point on the curve answers the question, \"If the price were this, how much would people buy?\"",[12,69,71],{"id":70},"supply-what-sellers-are-willing-to-offer","Supply: what sellers are willing to offer",[17,73,74,77,78,81],{},[21,75,76],{},"Supply"," describes how much producers are willing to sell at each price. The ",[21,79,80],{},"law of supply"," runs the other way: a higher price makes it worth producing more, so quantity supplied rises with price.",[17,83,84,85,88],{},"Why? Producing more usually gets harder at the margin. A farm has to use less fertile land, a factory has to pay overtime, a mine has to dig deeper. Those extra units only make sense if the price covers their higher cost. A higher price also attracts new sellers into the market. The result is an upward-sloping ",[21,86,87],{},"supply curve",".",[12,90,92],{"id":91},"equilibrium-where-the-curves-meet","Equilibrium: where the curves meet",[17,94,95],{},"Put the two curves together and something useful happens. At most prices, buyers and sellers disagree:",[46,97,98,109],{},[49,99,100,101,104,105,108],{},"If the price is ",[21,102,103],{},"too high",", sellers offer more than buyers want. Unsold goods pile up (a ",[21,106,107],{},"surplus","), and sellers cut prices to clear them.",[49,110,100,111,114,115,118],{},[21,112,113],{},"too low",", buyers want more than sellers offer. Shelves empty and waiting lists form (a ",[21,116,117],{},"shortage","), and sellers find they can charge more.",[17,120,121,122,88],{},"Both pressures push the price toward the one point where the quantity demanded equals the quantity supplied. That is the ",[21,123,124],{},"equilibrium price",[17,126,127,128,298,299,327,328,453],{},"Here is a worked example. Suppose that for a certain product, buyers want ",[129,130,133,179],"span",{"className":131},[132],"katex",[129,134,137],{"className":135},[136],"katex-mathml",[138,139,141],"math",{"xmlns":140},"http:\u002F\u002Fwww.w3.org\u002F1998\u002FMath\u002FMathML",[142,143,144,174],"semantics",{},[145,146,147,157,161,165,168,171],"mrow",{},[148,149,150,154],"msub",{},[151,152,153],"mi",{},"Q",[151,155,156],{},"d",[158,159,160],"mo",{},"=",[162,163,164],"mn",{},"100",[158,166,167],{},"−",[162,169,170],{},"2",[151,172,173],{},"P",[175,176,178],"annotation",{"encoding":177},"application\u002Fx-tex","Q_d = 100 - 2P",[129,180,184,263,284],{"className":181,"ariaHidden":183},[182],"katex-html","true",[129,185,188,193,251,256,260],{"className":186},[187],"base",[129,189],{"className":190,"style":192},[191],"strut","height:0.8778em;vertical-align:-0.1944em;",[129,194,197,201],{"className":195},[196],"mord",[129,198,153],{"className":199},[196,200],"mathnormal",[129,202,205],{"className":203},[204],"msupsub",[129,206,210,242],{"className":207},[208,209],"vlist-t","vlist-t2",[129,211,214,237],{"className":212},[213],"vlist-r",[129,215,219],{"className":216,"style":218},[217],"vlist","height:0.3361em;",[129,220,222,227],{"style":221},"top:-2.55em;margin-left:0em;margin-right:0.05em;",[129,223],{"className":224,"style":226},[225],"pstrut","height:2.7em;",[129,228,234],{"className":229},[230,231,232,233],"sizing","reset-size6","size3","mtight",[129,235,156],{"className":236},[196,200,233],[129,238,241],{"className":239},[240],"vlist-s","​",[129,243,245],{"className":244},[213],[129,246,249],{"className":247,"style":248},[217],"height:0.15em;",[129,250],{},[129,252],{"className":253,"style":255},[254],"mspace","margin-right:0.2778em;",[129,257,160],{"className":258},[259],"mrel",[129,261],{"className":262,"style":255},[254],[129,264,266,270,273,277,281],{"className":265},[187],[129,267],{"className":268,"style":269},[191],"height:0.7278em;vertical-align:-0.0833em;",[129,271,164],{"className":272},[196],[129,274],{"className":275,"style":276},[254],"margin-right:0.2222em;",[129,278,167],{"className":279},[280],"mbin",[129,282],{"className":283,"style":276},[254],[129,285,287,291,294],{"className":286},[187],[129,288],{"className":289,"style":290},[191],"height:0.6833em;",[129,292,170],{"className":293},[196],[129,295,173],{"className":296,"style":297},[196,200],"margin-right:0.1389em;"," units at price ",[129,300,302,315],{"className":301},[132],[129,303,305],{"className":304},[136],[138,306,307],{"xmlns":140},[142,308,309,313],{},[145,310,311],{},[151,312,173],{},[175,314,173],{"encoding":177},[129,316,318],{"className":317,"ariaHidden":183},[182],[129,319,321,324],{"className":320},[187],[129,322],{"className":323,"style":290},[191],[129,325,173],{"className":326,"style":297},[196,200],", and sellers offer ",[129,329,331,362],{"className":330},[132],[129,332,334],{"className":333},[136],[138,335,336],{"xmlns":140},[142,337,338,359],{},[145,339,340,347,349,352,354,356],{},[148,341,342,344],{},[151,343,153],{},[151,345,346],{},"s",[158,348,160],{},[162,350,351],{},"3",[151,353,173],{},[158,355,167],{},[162,357,358],{},"20",[175,360,361],{"encoding":177},"Q_s = 3P - 20",[129,363,365,421,443],{"className":364,"ariaHidden":183},[182],[129,366,368,371,412,415,418],{"className":367},[187],[129,369],{"className":370,"style":192},[191],[129,372,374,377],{"className":373},[196],[129,375,153],{"className":376},[196,200],[129,378,380],{"className":379},[204],[129,381,383,404],{"className":382},[208,209],[129,384,386,401],{"className":385},[213],[129,387,390],{"className":388,"style":389},[217],"height:0.1514em;",[129,391,392,395],{"style":221},[129,393],{"className":394,"style":226},[225],[129,396,398],{"className":397},[230,231,232,233],[129,399,346],{"className":400},[196,200,233],[129,402,241],{"className":403},[240],[129,405,407],{"className":406},[213],[129,408,410],{"className":409,"style":248},[217],[129,411],{},[129,413],{"className":414,"style":255},[254],[129,416,160],{"className":417},[259],[129,419],{"className":420,"style":255},[254],[129,422,424,428,431,434,437,440],{"className":423},[187],[129,425],{"className":426,"style":427},[191],"height:0.7667em;vertical-align:-0.0833em;",[129,429,351],{"className":430},[196],[129,432,173],{"className":433,"style":297},[196,200],[129,435],{"className":436,"style":276},[254],[129,438,167],{"className":439},[280],[129,441],{"className":442,"style":276},[254],[129,444,446,450],{"className":445},[187],[129,447],{"className":448,"style":449},[191],"height:0.6444em;",[129,451,358],{"className":452},[196]," units.",[129,455,458],{"className":456},[457],"katex-display",[129,459,461,519],{"className":460},[132],[129,462,464],{"className":463},[136],[138,465,467],{"xmlns":140,"display":466},"block",[142,468,469,516],{},[145,470,471,473,475,477,479,481,483,485,487,489,492,495,497,499,501,504,507,509,511,513],{},[162,472,164],{},[158,474,167],{},[162,476,170],{},[151,478,173],{},[158,480,160],{},[162,482,351],{},[151,484,173],{},[158,486,167],{},[162,488,358],{},[254,490],{"width":491},"1em",[158,493,494],{},"⇒",[254,496],{"width":491},[151,498,173],{},[158,500,160],{},[162,502,503],{},"24",[158,505,506],{"separator":183},",",[254,508],{"width":491},[151,510,153],{},[158,512,160],{},[162,514,515],{},"52",[175,517,518],{"encoding":177},"100 - 2P = 3P - 20 \\quad\\Rightarrow\\quad P = 24, \\quad Q = 52",[129,520,522,540,561,582,607,625,657],{"className":521,"ariaHidden":183},[182],[129,523,525,528,531,534,537],{"className":524},[187],[129,526],{"className":527,"style":269},[191],[129,529,164],{"className":530},[196],[129,532],{"className":533,"style":276},[254],[129,535,167],{"className":536},[280],[129,538],{"className":539,"style":276},[254],[129,541,543,546,549,552,555,558],{"className":542},[187],[129,544],{"className":545,"style":290},[191],[129,547,170],{"className":548},[196],[129,550,173],{"className":551,"style":297},[196,200],[129,553],{"className":554,"style":255},[254],[129,556,160],{"className":557},[259],[129,559],{"className":560,"style":255},[254],[129,562,564,567,570,573,576,579],{"className":563},[187],[129,565],{"className":566,"style":427},[191],[129,568,351],{"className":569},[196],[129,571,173],{"className":572,"style":297},[196,200],[129,574],{"className":575,"style":276},[254],[129,577,167],{"className":578},[280],[129,580],{"className":581,"style":276},[254],[129,583,585,588,591,595,598,601,604],{"className":584},[187],[129,586],{"className":587,"style":449},[191],[129,589,358],{"className":590},[196],[129,592],{"className":593,"style":594},[254],"margin-right:1em;",[129,596],{"className":597,"style":255},[254],[129,599,494],{"className":600},[259],[129,602],{"className":603,"style":594},[254],[129,605],{"className":606,"style":255},[254],[129,608,610,613,616,619,622],{"className":609},[187],[129,611],{"className":612,"style":290},[191],[129,614,173],{"className":615,"style":297},[196,200],[129,617],{"className":618,"style":255},[254],[129,620,160],{"className":621},[259],[129,623],{"className":624,"style":255},[254],[129,626,628,631,634,638,641,645,648,651,654],{"className":627},[187],[129,629],{"className":630,"style":192},[191],[129,632,503],{"className":633},[196],[129,635,506],{"className":636},[637],"mpunct",[129,639],{"className":640,"style":594},[254],[129,642],{"className":643,"style":644},[254],"margin-right:0.1667em;",[129,646,153],{"className":647},[196,200],[129,649],{"className":650,"style":255},[254],[129,652,160],{"className":653},[259],[129,655],{"className":656,"style":255},[254],[129,658,660,663],{"className":659},[187],[129,661],{"className":662,"style":449},[191],[129,664,515],{"className":665},[196],[17,667,668],{},"At $24, buyers want 52 units and sellers offer exactly 52. At $30, sellers would offer 70 but buyers would take only 40, a surplus of 30 units. At $15, buyers would want 70 but sellers would offer only 25, a shortage of 45.",[670,671],"article-chart",{":labels":672,":series":673,"title":674,"unit":675},"[\"$10\",\"$15\",\"$20\",\"$25\",\"$30\",\"$35\",\"$40\"]","[{\"name\":\"Quantity demanded\",\"data\":[80,70,60,50,40,30,20]},{\"name\":\"Quantity supplied\",\"data\":[10,25,40,55,70,85,100]}]","Demand and supply at each price (units)","units",[17,677,678],{},"Nobody has to calculate this in a real market. Millions of buyers and sellers, each reacting to prices, find the equilibrium through trial and error. That is what the economist Friedrich Hayek meant when he described prices as a system for communicating information: a price tells everyone, in a single number, how scarce something is.",[680,681,682],"pull-quote",{},[17,683,684],{},"A price is a message. It tells buyers how scarce something is and tells sellers how much it is wanted.",[12,686,688],{"id":687},"movement-along-a-curve-vs-a-shift-of-the-curve","Movement along a curve vs. a shift of the curve",[17,690,691],{},"This distinction trips up many people, so it is worth slowing down.",[46,693,694,706],{},[49,695,696,697,700,701,705],{},"A ",[21,698,699],{},"change in quantity demanded"," is a movement ",[702,703,704],"em",{},"along"," the demand curve, caused only by a change in the good's own price.",[49,707,696,708,711,712,715],{},[21,709,710],{},"change in demand"," is a ",[702,713,714],{},"shift"," of the whole curve, caused by something else. At every price, people now want more (or less) than before.",[17,717,718],{},"The same applies to supply.",[720,721,723],"h3",{"id":722},"what-shifts-demand","What shifts demand",[46,725,726,732,738,744,750],{},[49,727,728,731],{},[21,729,730],{},"Income."," For most goods, higher incomes raise demand. These are called normal goods. For some goods, such as instant noodles or bus travel in some places, demand falls as income rises; these are called inferior goods.",[49,733,734,737],{},[21,735,736],{},"Prices of related goods."," If the price of a substitute rises (tea), demand for coffee rises. If the price of a complement rises (milk), demand for coffee may fall.",[49,739,740,743],{},[21,741,742],{},"Tastes and information."," A health study or a viral video can shift demand overnight.",[49,745,746,749],{},[21,747,748],{},"Expectations."," If people expect prices to rise next month, they buy more today.",[49,751,752,755],{},[21,753,754],{},"Number of buyers."," Population growth or a new export market adds demand.",[720,757,759],{"id":758},"what-shifts-supply","What shifts supply",[46,761,762,768,774,780,786],{},[49,763,764,767],{},[21,765,766],{},"Input costs."," Higher wages, energy, or raw material prices make production more expensive and shift supply to the left.",[49,769,770,773],{},[21,771,772],{},"Technology."," Better methods lower costs and shift supply to the right. This is why the price of computing power has fallen for decades.",[49,775,776,779],{},[21,777,778],{},"Number of sellers."," New entrants increase supply; closures reduce it.",[49,781,782,785],{},[21,783,784],{},"Weather and disasters."," Droughts, floods, and pandemics can disrupt supply suddenly.",[49,787,788,791],{},[21,789,790],{},"Taxes and subsidies."," A tax on producers acts like a higher cost; a subsidy acts like a lower one.",[17,793,794,795,915,916,968,969,1021],{},"Back to our example: suppose a popular endorsement raises demand by 20 units at every price, so ",[129,796,798,827],{"className":797},[132],[129,799,801],{"className":800},[136],[138,802,803],{"xmlns":140},[142,804,805,824],{},[145,806,807,813,815,818,820,822],{},[148,808,809,811],{},[151,810,153],{},[151,812,156],{},[158,814,160],{},[162,816,817],{},"120",[158,819,167],{},[162,821,170],{},[151,823,173],{},[175,825,826],{"encoding":177},"Q_d = 120 - 2P",[129,828,830,885,903],{"className":829,"ariaHidden":183},[182],[129,831,833,836,876,879,882],{"className":832},[187],[129,834],{"className":835,"style":192},[191],[129,837,839,842],{"className":838},[196],[129,840,153],{"className":841},[196,200],[129,843,845],{"className":844},[204],[129,846,848,868],{"className":847},[208,209],[129,849,851,865],{"className":850},[213],[129,852,854],{"className":853,"style":218},[217],[129,855,856,859],{"style":221},[129,857],{"className":858,"style":226},[225],[129,860,862],{"className":861},[230,231,232,233],[129,863,156],{"className":864},[196,200,233],[129,866,241],{"className":867},[240],[129,869,871],{"className":870},[213],[129,872,874],{"className":873,"style":248},[217],[129,875],{},[129,877],{"className":878,"style":255},[254],[129,880,160],{"className":881},[259],[129,883],{"className":884,"style":255},[254],[129,886,888,891,894,897,900],{"className":887},[187],[129,889],{"className":890,"style":269},[191],[129,892,817],{"className":893},[196],[129,895],{"className":896,"style":276},[254],[129,898,167],{"className":899},[280],[129,901],{"className":902,"style":276},[254],[129,904,906,909,912],{"className":905},[187],[129,907],{"className":908,"style":290},[191],[129,910,170],{"className":911},[196],[129,913,173],{"className":914,"style":297},[196,200],". The new equilibrium is ",[129,917,919,938],{"className":918},[132],[129,920,922],{"className":921},[136],[138,923,924],{"xmlns":140},[142,925,926,935],{},[145,927,928,930,932],{},[151,929,173],{},[158,931,160],{},[162,933,934],{},"28",[175,936,937],{"encoding":177},"P = 28",[129,939,941,959],{"className":940,"ariaHidden":183},[182],[129,942,944,947,950,953,956],{"className":943},[187],[129,945],{"className":946,"style":290},[191],[129,948,173],{"className":949,"style":297},[196,200],[129,951],{"className":952,"style":255},[254],[129,954,160],{"className":955},[259],[129,957],{"className":958,"style":255},[254],[129,960,962,965],{"className":961},[187],[129,963],{"className":964,"style":449},[191],[129,966,934],{"className":967},[196]," and ",[129,970,972,991],{"className":971},[132],[129,973,975],{"className":974},[136],[138,976,977],{"xmlns":140},[142,978,979,988],{},[145,980,981,983,985],{},[151,982,153],{},[158,984,160],{},[162,986,987],{},"64",[175,989,990],{"encoding":177},"Q = 64",[129,992,994,1012],{"className":993,"ariaHidden":183},[182],[129,995,997,1000,1003,1006,1009],{"className":996},[187],[129,998],{"className":999,"style":192},[191],[129,1001,153],{"className":1002},[196,200],[129,1004],{"className":1005,"style":255},[254],[129,1007,160],{"className":1008},[259],[129,1010],{"className":1011,"style":255},[254],[129,1013,1015,1018],{"className":1014},[187],[129,1016],{"className":1017,"style":449},[191],[129,1019,987],{"className":1020},[196],". Both price and quantity rise. An increase in supply, by contrast, would lower the price and raise the quantity.",[1023,1024,1025,1041],"table",{},[1026,1027,1028],"thead",{},[1029,1030,1031,1035,1038],"tr",{},[1032,1033,1034],"th",{},"Change",[1032,1036,1037],{},"Effect on price",[1032,1039,1040],{},"Effect on quantity",[1042,1043,1044,1055,1065,1074],"tbody",{},[1029,1045,1046,1050,1053],{},[1047,1048,1049],"td",{},"Demand rises",[1047,1051,1052],{},"Up",[1047,1054,1052],{},[1029,1056,1057,1060,1063],{},[1047,1058,1059],{},"Demand falls",[1047,1061,1062],{},"Down",[1047,1064,1062],{},[1029,1066,1067,1070,1072],{},[1047,1068,1069],{},"Supply rises",[1047,1071,1062],{},[1047,1073,1052],{},[1029,1075,1076,1079,1081],{},[1047,1077,1078],{},"Supply falls",[1047,1080,1052],{},[1047,1082,1062],{},[17,1084,1085],{},"When both curves shift at once, one of the two results becomes uncertain. If demand and supply both rise, quantity definitely rises, but whether price rises depends on which shift is larger.",[12,1087,1089],{"id":1088},"elasticity-how-strongly-people-respond","Elasticity: how strongly people respond",[17,1091,1092,1093,1096],{},"Knowing the direction of a change is useful; knowing its size is more useful. ",[21,1094,1095],{},"Price elasticity of demand"," measures how much the quantity demanded responds to a change in price.",[129,1098,1100],{"className":1099},[457],[129,1101,1103,1130],{"className":1102},[132],[129,1104,1106],{"className":1105},[136],[138,1107,1108],{"xmlns":140,"display":466},[142,1109,1110,1127],{},[145,1111,1112,1116,1118],{},[1113,1114,1115],"mtext",{},"Elasticity",[158,1117,160],{},[1119,1120,1121,1124],"mfrac",{},[1113,1122,1123],{},"Percent change in quantity",[1113,1125,1126],{},"Percent change in price",[175,1128,1129],{"encoding":177},"\\text{Elasticity} = \\frac{\\text{Percent change in quantity}}{\\text{Percent change in price}}",[129,1131,1133,1156],{"className":1132,"ariaHidden":183},[182],[129,1134,1136,1140,1147,1150,1153],{"className":1135},[187],[129,1137],{"className":1138,"style":1139},[191],"height:0.8889em;vertical-align:-0.1944em;",[129,1141,1144],{"className":1142},[196,1143],"text",[129,1145,1115],{"className":1146},[196],[129,1148],{"className":1149,"style":255},[254],[129,1151,160],{"className":1152},[259],[129,1154],{"className":1155,"style":255},[254],[129,1157,1159,1163],{"className":1158},[187],[129,1160],{"className":1161,"style":1162},[191],"height:2.2519em;vertical-align:-0.8804em;",[129,1164,1166,1171,1238],{"className":1165},[196],[129,1167],{"className":1168},[1169,1170],"mopen","nulldelimiter",[129,1172,1174],{"className":1173},[1119],[129,1175,1177,1229],{"className":1176},[208,209],[129,1178,1180,1226],{"className":1179},[213],[129,1181,1184,1200,1211],{"className":1182,"style":1183},[217],"height:1.3714em;",[129,1185,1187,1191],{"style":1186},"top:-2.314em;",[129,1188],{"className":1189,"style":1190},[225],"height:3em;",[129,1192,1194],{"className":1193},[196],[129,1195,1197],{"className":1196},[196,1143],[129,1198,1126],{"className":1199},[196],[129,1201,1203,1206],{"style":1202},"top:-3.23em;",[129,1204],{"className":1205,"style":1190},[225],[129,1207],{"className":1208,"style":1210},[1209],"frac-line","border-bottom-width:0.04em;",[129,1212,1214,1217],{"style":1213},"top:-3.677em;",[129,1215],{"className":1216,"style":1190},[225],[129,1218,1220],{"className":1219},[196],[129,1221,1223],{"className":1222},[196,1143],[129,1224,1123],{"className":1225},[196],[129,1227,241],{"className":1228},[240],[129,1230,1232],{"className":1231},[213],[129,1233,1236],{"className":1234,"style":1235},[217],"height:0.8804em;",[129,1237],{},[129,1239],{"className":1240},[1241,1170],"mclose",[46,1243,1244,1250],{},[49,1245,1246,1249],{},[21,1247,1248],{},"Elastic demand"," (elasticity above 1 in absolute terms): quantity responds strongly. Restaurant meals, a specific brand of cereal, and airline tickets for leisure trips tend to be elastic, because there are good substitutes or the purchase can be postponed.",[49,1251,1252,1255],{},[21,1253,1254],{},"Inelastic demand"," (below 1): quantity barely moves. Insulin, tap water, gasoline in the short run, and cigarettes for regular smokers tend to be inelastic, because there are few substitutes or the item is a necessity.",[17,1257,1258],{},"Elasticity explains the farmer's paradox. Demand for staple foods is inelastic, so a bumper harvest that raises supply causes a large fall in price but only a small rise in quantity sold. Total revenue for farmers can actually fall in a good year.",[17,1260,1261],{},"It also explains who really pays a tax. When demand is inelastic, sellers can pass most of a tax on to buyers, because buyers keep purchasing. When demand is elastic, sellers absorb more of it.",[12,1263,1265],{"id":1264},"when-governments-set-prices","When governments set prices",[17,1267,1268],{},"Sometimes governments override the market price, usually for understandable reasons. Supply and demand predict the side effects.",[46,1270,1271,1277],{},[49,1272,696,1273,1276],{},[21,1274,1275],{},"price ceiling"," is a legal maximum, such as rent control or a cap on fuel prices during a crisis. If it is set below the equilibrium, quantity demanded exceeds quantity supplied: shortages, queues, and black markets often follow, and quality may decline because sellers have little reason to invest.",[49,1278,696,1279,1282],{},[21,1280,1281],{},"price floor"," is a legal minimum, such as a minimum wage or guaranteed crop prices. If it is set above the equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. For crops, governments sometimes buy and store the surplus.",[17,1284,1285],{},"The real-world effects depend on how far the controlled price is from equilibrium and on elasticities. Economists still debate, for example, how much modest minimum wage increases reduce employment, because labor markets have features the basic model leaves out.",[12,1287,1289],{"id":1288},"where-the-simple-model-breaks-down","Where the simple model breaks down",[17,1291,1292],{},"Supply and demand is a powerful starting point, but it rests on assumptions that real markets often violate:",[46,1294,1295,1301,1307,1317],{},[49,1296,1297,1300],{},[21,1298,1299],{},"Many buyers and sellers."," When a few firms dominate, as in a monopoly or oligopoly, they can set prices above the competitive level.",[49,1302,1303,1306],{},[21,1304,1305],{},"Good information."," Buyers of used cars, insurance, or medical care often know far less than sellers, which can make markets work poorly.",[49,1308,1309,1312,1313,1316],{},[21,1310,1311],{},"No spillovers."," Pollution imposes costs on people who are not part of the transaction. Economists call these ",[21,1314,1315],{},"externalities","; markets left alone tend to produce too much of things with harmful spillovers and too little of things with helpful ones, such as vaccinations or research.",[49,1318,1319,1322],{},[21,1320,1321],{},"Excludable goods."," Some goods, like national defense or street lighting, benefit everyone whether or not they pay, so markets struggle to supply them.",[17,1324,1325],{},"These exceptions do not make the model wrong. They tell you where to look more carefully, and they explain much of what governments do in the economy.",[12,1327,1329],{"id":1328},"key-ideas-to-remember","Key ideas to remember",[46,1331,1332,1335,1338,1341,1344,1347],{},[49,1333,1334],{},"Prices coordinate the choices of millions of people by signaling scarcity.",[49,1336,1337],{},"Demand slopes down, supply slopes up, and the market moves toward the price where they meet.",[49,1339,1340],{},"A change in the good's own price moves you along a curve; anything else shifts the curve.",[49,1342,1343],{},"Elasticity tells you how big the response will be, and who bears the cost of taxes.",[49,1345,1346],{},"Price controls create shortages or surpluses when set away from equilibrium.",[49,1348,1349],{},"The model works best in competitive markets with good information and no large spillovers.",[17,1351,1352,1353,1358,1359,1362],{},"Next, see how a general rise in prices differs from a change in one market in our guide to ",[1354,1355,1357],"a",{"href":1356},"\u002Farticles\u002Finflation-explained","inflation",", or look up ",[1354,1360,1357],{"href":1361},"\u002Fdictionary\u002Finflation"," in the dictionary.",{"title":1364,"searchDepth":1365,"depth":1365,"links":1366},"",2,[1367,1368,1369,1370,1371,1376,1377,1378,1379],{"id":14,"depth":1365,"text":15},{"id":30,"depth":1365,"text":31},{"id":70,"depth":1365,"text":71},{"id":91,"depth":1365,"text":92},{"id":687,"depth":1365,"text":688,"children":1372},[1373,1375],{"id":722,"depth":1374,"text":723},3,{"id":758,"depth":1374,"text":759},{"id":1088,"depth":1365,"text":1089},{"id":1264,"depth":1365,"text":1265},{"id":1288,"depth":1365,"text":1289},{"id":1328,"depth":1365,"text":1329},"economy","The most important idea in economics, explained from scratch: why prices rise and fall, what moves the curves, and where the model breaks down.","md","guide",{},true,"\u002Farticles\u002Fsupply-and-demand-explained","2026-10-29",8,"Lynktor Research Desk",{"title":6,"description":1381},"articles\u002Fsupply-and-demand-explained",false,"V3hyN5h00C7UIQOFMvk5-bfQZAgfBSz7Men__eDdGrs",[1395,1400,1405],{"title":1396,"description":1397,"path":1398,"category":1380,"readingTime":1399},"Fiscal Policy and Government Debt, Explained","How governments tax, spend, and borrow; the difference between deficits and debt; when stimulus works; and when debt becomes a problem.","\u002Farticles\u002Ffiscal-policy-and-government-debt",6,{"title":1401,"description":1402,"path":1403,"category":1380,"readingTime":1404},"GDP and the Business Cycle: How Economies Grow and Shrink","What gross domestic product measures, how it is calculated three ways, why real GDP matters more than nominal, and how expansions and recessions unfold.","\u002Farticles\u002Fgdp-and-the-business-cycle",7,{"title":1406,"description":1407,"path":1408,"category":1380,"readingTime":1399},"How Money and Banks Work","What makes something money, how banks create most of it when they lend, what central banks control, and why bank runs happen.","\u002Farticles\u002Fhow-money-and-banks-work",1793277328000]