The relationship between supply and demand is a fundamental economic principle that explains how the quantity of a product supplied by producers and the quantity demanded by consumers interact to determine market prices.
- Supply refers to the amount of a good or service that producers are willing and able to sell at different prices. Typically, as the price of a product rises, producers are motivated to supply more because higher prices can lead to greater profits. Conversely, if prices fall, supply tends to decrease
- Demand refers to the amount of a good or service that consumers are willing and able to purchase at various prices. Generally, demand decreases as prices rise and increases as prices fall, reflecting consumers' sensitivity to price changes
- The law of supply and demand states that the price of a product adjusts to balance the quantity supplied and the quantity demanded. When supply exceeds demand, prices tend to fall; when demand exceeds supply, prices tend to rise
- The point where the supply curve (upward sloping) and demand curve (downward sloping) intersect is called the equilibrium price or market-clearing price. At this price, the quantity supplied equals the quantity demanded, and the market is in balance with no surplus or shortage
- This relationship is dynamic: changes in factors affecting supply (like production costs or regulations) or demand (like consumer preferences or income) shift the curves, leading to new equilibrium prices and quantities
In summary, supply and demand are interdependent forces that determine the price and quantity of goods in a market. Prices rise when demand outpaces supply and fall when supply exceeds demand, guiding producers and consumers toward market equilibrium
