Read an Academic Passage

The Economic Law of Supply and Demand

A foundational principle of modern economics is the law of supply and demand, which describes how the interaction between the availability of a resource and the desire for it determines its price in a market. This concept explains how prices are set for nearly everything we buy, from a loaf of bread to a share of stock. The law is based on the relationship between two independent forces: supply, which is the amount of a good or service that producers are willing to sell at a certain price, and demand, which is the amount consumers are willing to buy.

The two parts of the law work in opposite ways. The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand it. Conversely, a lower price will increase demand. The law of supply states that a higher price leads to a higher quantity supplied, as producers are motivated by the potential for greater profit. The market reaches an "equilibrium price" when the quantity supplied is equal to the quantity demanded. At this point, the market is stable because there is neither a surplus nor a shortage of the good. The supply and demand curves intersect at this point.

In reality, markets are rarely static. Various factors can cause the supply or demand curves to shift, leading to a new equilibrium price. For instance, a change in consumer preferences or an increase in average income can shift the entire demand curve. A technological innovation that lowers production costs or a change in the price of raw materials can shift the supply curve. Understanding these dynamics allows businesses to make informed pricing decisions and helps governments to predict the effects of economic policies like taxes or subsidies.