Summary
Highlights
The law of demand states that buyers will demand less of an economic good at higher prices because the opportunity cost increases. Conversely, the law of supply states that sellers will supply more of an economic good at higher prices to increase revenue.
Market equilibrium occurs when the supply in the market equals the demand. The equilibrium price is the price at which supply meets demand. This point can be found by plotting quantity demanded and quantity supplied on a graph, with the intersection representing the equilibrium price and quantity.
If the market price is above the equilibrium, there is an excess surplus, leading sellers to reduce prices. If the market price is below the equilibrium, there is an excess demand or a shortage, causing buyers to bid up prices until some buyers drop out.
A change in demand refers to a shift of the entire demand curve due to factors like preferences, income, prices of substitutes/complements, expectations, or population. A shift to the right indicates increased demand, while a shift to the left indicates decreased demand. A change in quantity demanded is a movement along the existing demand curve, caused solely by a change in price.
A change in supply refers to a shift of the entire supply curve, influenced by factors such as changes in costs, input prices, technology, regulations, and expectations. A decrease in supply shifts the curve left (or upwards), and an increase shifts it right (or downwards). A change in quantity supplied is a movement along the existing supply curve, caused by a change in price.