In microeconomics, supply and demand are controlled by price.
Price dictates supply and demand
How does decreasing the price of a good change the behavior of consumers and producers? Consumers are motivated to buy more, while producers want to supply less.
Consider what happens when the price of a good increases. How does it change the behavior of buyers and sellers? Buyers demand decreases and sellers want to supply more.
Graphing the supply for a good at various prices is called the supply curve.
Similarly, a graph of the demand for a good at various prices is called a demand curve.
Graphing the supply and demand curves together makes it easier to understand the market. Supply and demand curves intersect where the demanded price and quantity equals the supplied price and quantity. This intersection is called the equilibrium point.
The law of supply and demand
The price where supply and demand are equal is the equilibrium price. The quantity at which the supply and demand are equal is the equilibrium quantity.
At a higher price, the supply goes up but demand goes down. This results in a surplus.
At lower prices, demand goes up but the supply decreases. This leads to a shortage.
When a surplus or shortage occurs, it doesn’t last forever. The law of supply and demand dictates that the price of any good will adjust to reach its equilibrium point.
If demand for a product is greater than what suppliers are able to produce, suppliers will charge more for it. This causes demand to decrease.
If demand for a product is lower than what suppliers are producing, suppliers will be forced to charge less. As a result, demand will increase.
Over time, these behaviors will cause the price pendulum to swing back and forth until it reaches the equilibrium point where
supply = demand.