Two coffee shops, one street, the same beans. One has a line out the door and the other is half empty. Most days the difference is a price, and this week you learn to read it.
Learning objectives. After this week you can (1) state the laws of demand and supply; (2) find a market's equilibrium price and quantity from a table; and (3) tell a shortage from a surplus, and a shift of a curve from a movement along it.
Remember this: a change in price moves you along the curve. A change in anything else shifts the curve.
1) Demand and supply
The law of demand: all else equal, when price rises, the quantity buyers want falls, so the demand curve slopes down. The law of supply: when price rises, sellers offer more, so the supply curve slopes up.
2) Equilibrium: where the curves cross
At equilibrium: Quantity Demanded = Quantity Supplied
| Price | Qty demanded | Qty supplied | Condition |
|---|---|---|---|
| $2 | 100 | 40 | Shortage of 60 |
| $3 | 80 | 60 | Shortage of 20 |
| $4 | 60 | 60 | Equilibrium (P = $4, Q = 60) |
| $5 | 40 | 80 | Surplus of 40 |
At $4, buyers want 60 cups and sellers offer 60, so nothing pushes the price up or down.
3) Shortage and surplus
Below equilibrium, buyers want more than sellers offer: a shortage, and the price tends to rise. Above it, sellers offer more than buyers want: a surplus, and the price tends to fall.
In your shop a shortage has a face: the customers your Daily Report says walked away from the line. Coffee is made to order, so there are no leftover cups. The closest thing to a surplus is a low Utilization: baristas and a machine ready to make cups nobody ordered.
4) What shifts the curves
- Demand shifts with income (more income raises demand for a normal good), the price of a substitute (pricier tea raises coffee demand), the price of a complement (pricier milk lowers latte demand), tastes, and the number of buyers.
- Supply shifts with input costs (beans, milk, wages), technology, and the number of sellers. Cheaper brewing or more shops shift supply right; pricier beans shift it left.
If demand shifts right and supply stays put, the equilibrium price rises.
Quick self-check
(a) At $3, buyers want 80 cups and sellers offer 60. Shortage or surplus, and how big? (b) Bean prices jump. Which curve shifts, and which way? (Answers: a shortage of 20; supply shifts left.)
Common mistakes
- Calling a price change a shift. Your own price moves you along the demand curve.
- Mixing up the two gaps. Shortage: buyers want more. Surplus: sellers offer more.
- Blaming price for everything. Rain or a busy weekday can move your cups too.
This week in the arena
On each Daily Report this week, write down your latte price, Customers served, and how many customers walked away from the line. A day with walk-aways is a day your counter ran short at that price. Put Common Grounds' latte price beside each day too; you will use it all term.