Law of Supply and Demand

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

The most fundamental laws in economics are the law of supply and the law of demand. Every economic event or situation is the product of the interaction of these two laws, i.e., law os supply and demand.

As per the law of supply, the quantity of goods supplied rises as the market price rises and falls as the price drops. Conversely, as per the law of demand, the quantity of the goods demanded falls as the price rises and vice versa.

Equilibrium Price

An equilibrium price is one at which each producer can sell all the products he wants to produce, and each consumer can buy all the goods he demands.

Generally, producers always would like to charge higher prices. They are limited by the law of demand, even if they have no competitors. The consumers will buy fewer units If producers insist on a higher price.

The law of supply puts a similar restriction on consumers. The consumers always would prefer to pay a lower price. But if they successfully insist on paying less, suppliers will produce less, and some demand will go unsatisfied.

It is the function of markets to find equilibrium prices which balance the supply of and demand for a good or service.

Demand Curves & Supply Curves

A demand curve maps the quantity of a good that consumers will buy at different prices. As the price increases, the number of units demanded decreases. That is because everyone’s resources are limited. As the price of goods increases, consumers buy less. Sometimes, consumers prefer to buy more of other goods which are relatively cheaper.

Similarly, a supply curve maps the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied. Equilibrium is the point at which the demand and supply curves intersect the single price at which the quantity demanded, and the quantity supplied is the same.