MODULE 02Market forces

Supply & Demand

Baseline · 7 cones / $2.00All modules

Module 02 · Theory

Supply, Demand, and Equilibrium

Mankiw · Ch. 4 · The market forces of supply and demand

The demand curve shows how many ice-cream cones buyers will purchase at each price. It slopes downward: at a lower price, more people are willing to buy. The supply curve shows how many cones sellers will offer; it slopes upward because a higher price covers the rising marginal cost of production.

Equilibrium is the intersection

Where the curves cross, quantity demanded equals quantity supplied. At the baseline that is 7 cones at $2.00. Nobody has an incentive to change behavior: buyers can purchase all they want at that price, and sellers sell all they bring to market.

Surplus and shortage

A price above equilibrium creates a surplus. Sellers offer more cones than buyers will take, so unsold inventory pushes the price down. A pricebelow equilibrium creates a shortage: buyers want more than is available, and bidding pushes the price up. The gap between Q_s and Q_d is the market imbalance.

Shifts versus movements

A change in price moves the economy along the curves. A change in anything else — income, tastes, input costs, technology — shifts a curve. In this model, the demand shift changes the choke price (the price at which demand reaches zero), and the supply shift changes the price needed to offer the first cone.

Steepness and elasticity

Steepness is a visual proxy for responsiveness, not elasticity itself. Along a linear curve, elasticity changes with the price even though the slope does not. Compare the extremes: flat curves mean quantity reacts strongly to price; steep curves mean it barely moves.

Formulas

Q_d = (a − P) / b

Q_s = (P − c) / d

Q* = (a − c) / (b + d)

Baseline: a = 19/6, c = 5/6, b = d = 1/6, so Q* = 7 and P* = $2.00.

Try this

01Set a price floor at $2.50. Quantity supplied is 10, quantity demanded is 4, so the surplus is 6 cones.
02Set a price ceiling at $1.50. The shortage is 6 cones — the mirror image of the floor.
03Apply “Demand boom.” The demand curve shifts right and both equilibrium price and quantity rise.
04Raise supply steepness to 2.0× and reset. The new equilibrium moves up and left: sellers need a higher price to supply the same quantity.

Live market$2.00 · Qd 7 · Qs 7

Equilibrium

DemandSupplyEquilibrium EMarket price clears the market

Click the plane to set a market price, or drag the white handle at the right edge. Focus the handle and use the arrow keys (Shift for larger steps; Home and End for the extremes).

Live readout

What the market says

At equilibrium

Quantity demanded

cones

At a price of $2.00 per cone

Quantity supplied

cones

At a price of $2.00 per cone

Market pressure

cones imbalance

Quantity demanded equals quantity supplied.

Equilibrium quantity

Where quantity demanded meets quantity supplied

7cones

Price gap to equilibrium

The market price is the equilibrium price.

0.00