Microeconomics is basically the study of individual choices in markets. Instead of looking at whole countries and their economic performance, we focus on individuals and how the market affects them.
Supply (the red line) is the amount producers are willing to sell at different prices. The keyword here is willing. Since the supply model is just a model, we cannot say for sure what producers will actually produce. We are speaking in hypothetical terms here. It makes sense then that as the price a producer can get for a good goes up, the more the producer will be able to make, since they’re getting more money for it. That’s why the slope of the supply line is positive.
Demand (the blue line) is the amount consumers desire to consume, backed by their purchasing power. Again, the key word is desire. Just because a consumer wants something does not mean they will get it. You’ll notice that in your every day decisions, the law of demand plays out. IF the price of cat food goes up, you’ll most likely start thinking about feeding your cats more leftovers from you and Poppy instead of shelling out more money for the same amount of Purina. That’s why the slope of the demand line is negative: as a consumer has to pay more for a good, they’ll want less of it.
Keep in mind: Supply and Demand relationships do not need to be linear. However, economists like to make pretty graphs, so it is easier to show the relationship this way.
Two other terms are very important here: Quantity Supplied and Quantity Demanded. These two terms are similar to Supply and Demand, but are changed by different things.
Let’s start with the difference between Demand and Quantity Demanded. Demand can be changed by a lot of things, including expectations, income, population, the price of substitution goods and complementary goods, and preferences. For example, if you get a bonus at work and your income goes up, you’ll likely be able to afford a lot more. Maybe you can finally afford that new cell phone you wanted, or even a new car! Therefore, your demand for goods will increase, making the line on the supply demand graph extend out. These other conditions, called parameters change demand in similar ways. For example, if the price of hot dogs skyrockets, the demand for mustard (a complementary good) will go down, and the demand for cheeseburgers (a substitute good) will probably go up, since hot dogs are more expensive than burgers now. Parameters move the whole demand curve out or in, depending on what exactly is happening, while price stays the same. This is important. Parameters change demand, keeping price the same. For quantity demanded, price changes, and the parameters are kept constant. When the price changes, we can move along the demand curve right where it is, no need to move it around.
Supply and Quantity Supplied are very similar. Supply gets changed by different parameters, though. Supply is affected by the number of suppliers, cost of production, technology, expectations, and weather. For example, everyone uses computers nowadays to order things online, making it way easier for companies to get orders and organize stock, making it easier for them to supply things, as they don’t have to pay someone to go through each order by hand. Supply well then move out since technology has made is easier and cheaper for producers to produce. Just like before, supply is affected by parameters while price is held constant. Quantity supplied is affected by price, all else equal.