The Demand Graph:
This graph shows how many people would be willing to pay for a good at a certain price. As the price for a good increases, then the quantity demanded will decrease.
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| The demand graph, with price on the Y axis and Quantity (demanded) on the X axis |
The Supply Graph:
This graph shows what the company supplying the good will be willing to sell the good for at a certain price. As the price rises, more of the good will be supplied. Why? Because all firms have a profit maximising objective.
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| The supply graph, with Quantity (supplied) on the X axis and Price on the Y axis. |
The Equilibrium Graph:
This combines both the graphs we have learnt about above-the Demand graph and the Supply graph. The point at which the two lines cross is called the Equilibrium.
As many people will know from they're Maths, that can only occur in one place, and if they are not parallel to each other. Well, considering the lines are not parallel, then there will be a point at which they cross.
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| The Equilibrium graph, with price on the Y-axis and Quantity demanded/supplied on the X axis |
The PPF:
PPF, short for Possibility Production Frontier, is when a graph shows the maximum possible
output of two goods made in the same factory. This, unlike the other three graphs I have covered in this post, is represented as a curve. If we take a farm, for example, a farmer can grow two different types of crop in it, wheat and tobacco. If the farmer grows tobacco, the land in some places would become unsuitable for the wheat to grow in. Therefore, not all of the land can be used.
If the company is operating inside the PPF area, then the resources are not being used as effectively as could be. It is not possible to operate outside this area without an upgrade in technology or more resources available to the company.
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| The PPF graph with 2 types of good show: Capital goods on the Y axis, and Consumer goods on the X axis |
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