Part A: Demand and Supply, and the Market Equilibrium

It has been conventional for economists to draw demand and supply diagrams, like the one shown below, with price (P) on the vertical axis and quantity (Q) on the horizontal axis. (This convention can be traced back, I believe, over a hundred years to the famous economist, Alfred Marshall. The habit is too entrenched now to change, so we'll follow suit.) Thus, to put this equation in slope-intercept form with P on the vertical axis, we'll need to invert the demand function. Rearranging and solving for P, we get P = 36 - 2Q^D.

Now suppose that supply is given by Q^S= -6 + P for all P > 6.(Don't be thrown off by the negative intercept; we're not producing negative quantities, but rather we're just saying that price has to be greater than 6 before anything will be produced.)We introduced the demand function in chapter 1; the supply function is analogous: supply shows the quantity that will be brought to market by the many sellers at each price level. Whereas demand reflects willingness to pay and therefore gives a measure of benefit, supply reflects willingness to sell and therefore shows the marginal cost of production across the industry (the reasoning here is fairly straightforward: as a seller, I'll only produce and sell a unit if I can cover the marginal cost of that unit). And as with demand, we'll need to invert the supply function to show it on the graph. Inverse supply is P = 6 + Q^S.

The graph below shows the inverse demand and supply curves: P 36 S 6 D QP 36 S Consumer surplus = S Producer surplus = S 6 Total surplus = S D