Demand is the relationship between the price of a good and the quantity that consumers are willing to buy. Think of it like a crowd at a concert: the higher the ticket price, the fewer people want to attend.
Mathematically: \$Q_d = a - bP\$ (where \$a,b>0\$).
Supply is the relationship between price and the quantity producers are willing to sell. Imagine a farmer’s market: the higher the price, the more farmers bring fresh produce.
Mathematically: \$Q_s = c + dP\$ (where \$c,d>0\$).
Equilibrium occurs where quantity demanded equals quantity supplied: \$Qd = Qs\$.
At equilibrium, the market clears – no excess supply or demand.
Some producers supply goods to multiple markets. The total supply to each market depends on the price in that market and the price in the other market.
| Market | Price (\$P\$) | Supply Function (\$Q\$) |
|---|---|---|
| Market A | \$P_A\$ | \$QA = \alpha + \beta PA + \gamma P_B\$ |
| Market B | \$P_B\$ | \$QB = \delta + \epsilon PB + \zeta P_A\$ |
🔄 Notice the cross‑price terms (\$\gamma PB\$, \$\zeta PA\$). They show how a change in one market’s price affects supply in the other.
Suppose a café supplies both coffee and tea. The supply of coffee depends on its own price and on the price of tea because customers might switch between them.
Think of a restaurant offering a main dish and a side. If the price of the main dish goes up, the restaurant might offer more side dishes to keep customers happy. The side dish supply reacts to the main dish price – that’s joint supply in action!