Supply and Demand

Viewed by economists as tools, not a theory. The concept of supply and demand is a way of viewing the world, allowing economists to understand the market and its prices.

Demand is the relationship between various hypothetical market prices for a good or service, and the total number of units that consumers want to purchase at each hypothetical price.

Supply is the relationship between various hypothetical market prices for a good or service, and the total number of units that producers want to sell at each hypothetical price.

Surplus occurs when producers are trying to sell more units of a good or service than consumers want to purchase.

Shortage occurs when consumers want to buy more units than producers want to sell.

The equilibrium price is the one at which the amount supplied exactly equals the amount demanded.

We can draw a graph to better understand the supply and demand.

Where supply and demand meets is where the equilibrium price occurs.

When there is a reduction in supply, a leftward shift in the supply curve occurs, making the price go higher.

When there is a reduction in demand, a leftward shift in the demand curve occurs, making the price go lower.

When there is a reduction in both, the price can either go higher or lower, depending on the situation.

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