Demand and supply refers to the interplay of the economic behavior of producers and consumers. The dynamics of demand and supply determine how much of a good will be provided and purchased at a specific price. Consumers tend to buy more of an item if its price is lower, while suppliers tend to offer more of an item for sale if its price is higher. The range of prices and quantities demanded is represented by a demand curve, which plots the change in quantity demand as prices change. The range of prices and quantities supplied is represented by a supply curve, which plots the change in quantity supplied as prices change. The price where the two curves intersect produces an equilibrium at which all of the good that is offered will be purchased. When the price or the quantity deviates from this market equilibrium, the price or quantity will exhibit a tendency over time to return to the equilibrium level. A number of factors can shift the demand or supply curves rightward (inceasing) or leftward (decreasing), causing the equilibrium point to shift.
At A Glance
Supply is the amount of a good that producers are willing to offer for sale at a range of different prices.
- A supply curve links combinations of prices and quantities supplied for a specific seller or market.
Quantity supplied is the quantity of a good that producers offer for sale at a specific price.
- The law of supply states as the price of a good rises, the quantity supplied will increase.
- Several factors can shift the supply curve.
Demand describes the desire and ability of consumers to purchase a good at a range of different prices.
- A demand curve links combinations of prices and quantities demanded for a specific person or market.
Quantity demanded is the quantity of a good that consumers are willing to buy at a specific price.
- The law of demand states price and quantity demanded are inversely related. As the price rises the quantity demanded falls, and when the price falls the quantity demanded rises, all other factors held constant.
- Various factors can shift the demand curve to the right or to the left.
- The demand for normal goods rises as consumer income increases. Inferior goods are those for which demand falls as consumer income rises.
- Demand for a good increases and the demand curve shifts to the right when the price of a substitute good increases. Demand for a good falls and the demand curve shifts to the left when the price of a complement rises.
Market equilibrium (market clearing) occurs when the quantity demanded equals the quantity supplied at the intersection of the supply and demand curves.
- A shortage occurs when the quantity demanded for a good exceeds the quantity supplied at a specific price. A surplus occurs when the quantity supplied of a good exceeds the quantity demanded at a specific price.
Market equilibrium can change if there is a shift in supply, a shift in demand, or both.