Tricks of reading supply and demand graphs

February 1, 2007 8:49 AM

I'm having the darndest time reading and discerning supply and demand graphs in Microeconomics, and I'm looking for suggestions from econ whizzes on how to improve in this area.

There is so much that can be read from a simple supply and demand graph: who is getting product and how much, who isn't, price ceilings and price floors etcetera etcetera. I want to get good at it, and I'm asking for any tricks in parsing all this information quickly and accurately. Where do I look first on the graph? What question do I ask first? What do you do to extract all that info from a few straight lines on a page?

posted by dropkick to education (6 comments total)

On a basic, linear, supply and demand graph, look first for the intersection of the supply and demand lines. That intersection is market equilibrium. A 90 degree straight line drawn from that point to the y axis will tell you the price at market equilibrium, and a 90 degree straight line from that point to the x axis will tell you the quantity supplied and the quantity demanded (which at market equilibrium are the same) at market equilibrium.

If a price ceiling is set below market equilibrium, draw a line parallel to the x axis from that price on the y axis across the supply and demand lines. The difference in quantity between where your ceiling line crossess the supply line and where it crosses the demand line is the shortage created by the price ceiling.

The same exercise done for a price floor set above market equilibrium will give you the surplus created.
posted by ewiar at 9:00 AM on February 1, 2007

*crosses the supply line...
posted by ewiar at 9:01 AM on February 1, 2007

Graph labels: What is the market? < - this can sometimes be very important.br>
S and D lines: Is this a typical supply-demand graph, or is there something unusual about it? (typical graphs will have quantity supplied increasing as price increases and quantity demanded decreasing as price increases; for some markets, however, this is not the case).

Elasticity: Look at the slope of the lines - are the S and D lines of similar slopes, or is one very elastic (horizontal) or very inelastic (vertical)? This gives a lot of information about the market.
posted by muddgirl at 9:09 AM on February 1, 2007

Elasticity, FYI, is how responsive demand/supply is to changes in price.
posted by ewiar at 4:46 PM on February 1, 2007

Thank you ewiar and muddgirl. Your comments help.
posted by dropkick at 5:17 PM on February 1, 2007

I always put myself on the graph. I would place a dot along a demand curve and say, "I want to buy a wii, but am I one of the dupes who pays 1000 bucks for it, or am I a person who buys it at Best Buy for market value, or perhaps a person who will only buy it if it's on Ebay for half price?" Or some other situation like that. If there is no situation given, make one up and soon you will just understand them from a personal standpoint, which is where I've gotten to (having passed a micro course at the #1 business school in the country).
posted by nursegracer at 7:58 PM on February 1, 2007