Supply and demand are foundational concepts in microeconomics that explain how prices and quantities of goods and services are determined in a market economy.

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1. 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.

• Law of Demand: As the price of a good increases, the quantity demanded generally decreases (and vice versa), assuming all other factors remain constant.
• Demand Curve: Typically slopes downward from left to right, showing the inverse relationship between price and quantity demanded.
• Determinants of Demand:
  • Price of the good
  • Consumer income
  • Prices of related goods (substitutes and complements)
  • Tastes and preferences
  • Expectations about future prices
  • Number of buyers

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2. Supply

Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices over a given period.

• Law of Supply: As the price of a good increases, the quantity supplied generally increases (and vice versa), assuming other factors remain constant.
• Supply Curve: Typically slopes upward from left to right, showing the direct relationship between price and quantity supplied.
• Determinants of Supply:
  • Price of the good
  • Costs of production (labor, materials, etc.)
  • Technology
  • Prices of related goods
  • Expectations about future prices
  • Number of sellers

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3. Market Equilibrium

• Equilibrium Price: The price at which quantity demanded equals quantity supplied.
• Equilibrium Quantity: The amount of goods bought and sold at the equilibrium price.
• If the market price is above equilibrium, a surplus occurs (excess supply).
• If the market price is below equilibrium, a shortage occurs (excess demand).

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4. Shifts vs. Movements

• A movement along the curve is caused by a change in the price of the good.
• A shift of the curve is caused by changes in other determinants (e.g., income, technology).