Supply and demand are fundamental concepts in economics that explain how markets function and how prices are determined.
Supply
Supply refers to the quantity of a good or service that producers are willing and able to sell at various prices over a given period. It is often represented by a supply curve that shows the relationship between price and quantity supplied. Generally, as prices increase, the quantity supplied also increases, as higher prices can lead to greater profits for producers.
Demand
Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices over a given period. A demand curve typically slopes downward, illustrating that as prices decrease, the quantity demanded increases. This occurs because lower prices make goods more accessible to consumers.
Equilibrium
The interaction of supply and demand determines the market equilibrium, where the quantity supplied equals the quantity demanded. At this point, the market is in balance, and there is no surplus (excess supply) or shortage (excess demand) of goods.
Shifts in Supply and Demand
- Shifts in Demand: Factors such as changes in consumer preferences, income levels, the prices of related goods, or population changes can shift the demand curve to the right (increase in demand) or to the left (decrease in demand).
- Shifts in Supply: Changes in production costs, technology, the number of suppliers, or regulatory policies can shift the supply curve in similar ways.
Price Mechanism
When there is a change in supply or demand, prices adjust based on the new market conditions. For instance:
- If demand increases while supply remains constant, prices will rise, leading producers to increase supply in response to the higher prices.
- Conversely, if supply increases while demand remains constant, prices will fall, encouraging consumers to purchase more.
This relationship illustrates how supply and demand interact to influence market dynamics and the allocation of resources in an economy.