The Supply and Demand Model

The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand).


The graph -1 depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S).
Displacements in demand are caused for any of the following causes, all operating at the same time, with different force, for any combinations of them, or for any single of the variables listed below:


- Changes in Income or Income’s allocation among people.
- Changes in the quantity of population.
- Changes in prices of complementary or substitutes goods (services).
- Changes in fashions or preferences (pushed by advertisement).



The graph -2 depicts an increase in supply from S1 to S2 along with the consequent decrease in price and increase in quantity required to reach a new market-clearing equilibrium pointed on the demand curve (D).
Displacements in supply curve are caused for any of the next causes, all operating at the same time with different force, for any combinations of them, or for any single of the variables listed below:

- Changes in cost structure.
- Changes in productive efficiency
- Changes in scales economies.The last above variables can be summarized as Changes in Technology