The Market Forces of Supply and Demand

The Market
Forces of Supply
and Demand
The Market
Forces of Supply
and Demand
Supply and demand are the fundamental forces that drive market
economies. They determine the quantity of goods produced and the
prices at which they are sold. Understanding these forces is crucial for
comprehending how events and policies impact the economy.
What Is a Market?
A market is a collection of buyers and sellers of a particular good or service. The buyers collectively determine the demand for the product, while
the sellers collectively determine the supply.
Markets can range from highly organized exchanges to less structured interactions. Regardless of their organization, the fundamental principles of
supply and demand apply.
Buyers Sellers
Determine demand for a product. Determine supply of a product.
What Is Competition?
Economists use the term "competitive market" to describe a market with numerous buyers and sellers, where each individual
has a negligible impact on the market price. In a perfectly competitive market, the goods offered are identical, and no single
buyer or seller can influence the price.
In such markets, buyers and sellers are considered "price takers," accepting the market-determined price. At this price, buyers
can purchase as much as they desire, and sellers can sell as much as they want.
Perfectly Competitive Market Price Takers
• Numerous buyers and sellers Buyers and sellers accept the market-determined price.
• Identical goods
• No individual influence on price
Demand
The quantity demanded of a good refers to the amount that buyers are willing and able to
purchase. The price of the good is a key determinant of the quantity demanded.
The law of demand states that, all else being equal, the quantity demanded of a good
decreases as its price increases. This relationship is illustrated by the demand curve, which
slopes downward, indicating that a lower price corresponds to a higher quantity demanded.
1 Price
The price of the good.
2 Quantity Demanded
The amount buyers are willing and able to purchase.
3 Law of Demand
As price increases, quantity demanded decreases.
Shifts in the Demand Curve
Changes in factors other than price can shift the demand curve. An increase in
demand shifts the curve to the right, indicating a higher quantity demanded at
every price. Conversely, a decrease in demand shifts the curve to the left,
indicating a lower quantity demanded at every price.
Several factors can influence demand shifts, including income, prices of related
goods, tastes, expectations, and the number of buyers.
1 Increase in Demand
Shift to the right, higher quantity demanded at every price.
2 Decrease in Demand
Shift to the left, lower quantity demanded at every price.
Supply
The quantity supplied of a good or service refers to the amount that sellers are willing and able
to sell. The price of the good is a key determinant of the quantity supplied.
The law of supply states that, all else being equal, the quantity supplied of a good increases as
its price increases. This relationship is illustrated by the supply curve, which slopes upward,
indicating that a higher price corresponds to a higher quantity supplied.
1 Price
The price of the good.
2 Quantity Supplied
The amount sellers are willing and able to sell.
3 Law of Supply
As price increases, quantity supplied increases.
Shifts in the Supply Curve
Changes in factors other than price can shift the supply curve. An increase in
supply shifts the curve to the right, indicating a higher quantity supplied at
every price. Conversely, a decrease in supply shifts the curve to the left,
indicating a lower quantity supplied at every price.
Several factors can influence supply shifts, including input prices, technology,
expectations, and the number of sellers.
1 Increase in Supply
Shift to the right, higher quantity supplied at every price.
2 Decrease in Supply
Shift to the left, lower quantity supplied at every price.
Supply and Demand
Together
The interaction of supply and demand determines the equilibrium price and quantity in
a market. Equilibrium occurs when the quantity supplied equals the quantity
demanded. At this point, the market is in balance, with no pressure for the price to
change.
When the price is above equilibrium, a surplus exists, leading to downward pressure on
prices. When the price is below equilibrium, a shortage exists, leading to upward
pressure on prices. The market naturally adjusts to reach equilibrium, where both
buyers and sellers are satisfied.
Surplus Quantity supplied > Downward pressure on

Quantity demanded prices
Shortage Quantity demanded > Upward pressure on

Quantity supplied prices

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The Market

Perfectly Competitive Market Price Takers

Surplus Quantity supplied > Downward pressure on

Shortage Quantity demanded > Upward pressure on

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