Supply and demand

The price (P) of a product is determined by a balance between production at each price (supply, S) and the desires of those with purchasing power at each price (demand, D). The diagram shows a positive shift in demand from D₁ to D₂, resulting in an increase in price and quantity sold (Q) of the product.

Supply and demand is a model of microeconomics. It describes how a price is formed in a market economy. There are two determining factors on such a market, the number of things made available, called supply, and the number of things consumers want, called demand. Supply and demand shows how producers and consumers interact with each other. This relationship will fix the price for a certain type of good. In perfect competition, the quantity demanded (demand) and the quantity supplied will be equal. This happens at the equilibrium market price.

For normal goods, and a normal market, there are four basic laws that determine the change in the market, if either supply or demand changes:

If the demand increases, and the supply remains the same, there will be a shortage, and the price will increase.
If the demand decreases, and the supply remains the same, there will be a surplus, and the price will go down.
If the supply increases, and the demand remains the same, there will be a surplus, and the price will go down.
If the supply decreases, and the demand remains the same, there will be a shortage, and the price will increase.

When there is more supply, this will cause prices to fall because people will not want to pay more for items that can be found easily. When there is more demand, prices will go up because many people want to buy the same item but there is not enough supply for it.

When demands for new goods and services go up, new markets come into being. The greater the demand, the faster this happens. This greater number of providers makes the supply go up, which forces the price down toward the cost of production and distribution.