supplyanddemand

Supply and demand is a fundamental economic model used to explain how the prices and quantities of goods and services are determined in a market. It posits two opposing forces: consumers who want to buy more at lower prices, and producers who want to sell more at higher prices. The interaction of the demand curve and the supply curve yields the market equilibrium, the price and quantity at which the market clears.

Demand: Demand is the relationship between the price of a good and the quantity consumers are willing and able to buy over a specific period, holding other factors constant. The law of demand states that, all else equal, a lower price increases quantity demanded and a higher price decreases it. The demand curve slopes downward. Determinants include income, prices of related goods, tastes, expectations, and the number of buyers. Exceptions arise for goods like Giffen or Veblen goods.

Supply: Supply is the relationship between the price and the quantity producers are willing to offer over a period, holding other factors constant. The law of supply asserts that higher prices incentivize greater production, so the supply curve tends to slope upward. Determinants include input costs, technology, prices of related outputs, expectations, taxes and subsidies, and the number of sellers. These factors can shift the entire supply curve.

Market outcomes and limitations: The intersection of supply and demand determines the equilibrium price and quantity. If the market price is above equilibrium, a surplus exists; if below, a shortage exists. Prices adjust to restore balance, and the model can be extended by considering elasticity, or responsiveness to price changes. While useful, the model relies on simplifying assumptions and may not capture all real-world frictions such as market power, information gaps, or time lags.