Law of Supply and Demand
Candlefocus EditorThis concept is often demonstrated through supply and demand curves which can be used to illustrate the behavior of a market as price changes. The demand curve measures the quantity of a good or service that customers are willing and able to buy at different price points. The supply curve shows the amount of the good or service that will be available at different prices. When the price of a good or service is higher than the market equilibrium, there is a surplus, which will result in a price decrease to bring the market back into balance. Conversely, when the price is lower than the equilibrium, there is a shortage and the result will be an increase in price to correct the imbalance.
Changes in external factors such as consumer preferences, technology, and government policies can shift the supply and demand curves, resulting in changes in the market equilibrium and therefore changes in the price of the product or service. The degree to which the demand or supply changes when the price changes is called the price elasticity of the good or service. As an example, the demand for basic necessities such as food and clothing tend to be relatively inelastic, meaning that the demand for these items is not very sensitive to changes in price.
In summary, the law of supply and demand is a cornerstone of economic theory and a fundamental reason why prices fluctuate in a market economy. Changes in the equilibrium price of a good or service occur when the balance between supply and demand is shifted as a result of changes in socio-economic conditions such as consumer preferences, technology, and government policies. The degree to which changes in price cause changes in demand or supply is known as the price elasticity. Different goods and services have different price elasticity, but generally the demand for basic necessities such as food and clothing tend to be relatively inelastic.