Read an Academic Passage

The Economic Principle of Supply and Demand

The law of supply and demand is a fundamental concept of market economics that describes the relationship between the availability of a product and the desire for it. In essence, it explains how prices are determined in a competitive market. The theory states that the price for a good or service will eventually settle at a point where the quantity that consumers are willing to purchase (demand) equals the quantity that producers are willing to provide (supply). This point of balance is referred to as the equilibrium price.

The principle is driven by two opposing forces. First is the law of demand, which posits that, assuming all other factors remain constant, the higher the price of a good, the less of it people will demand. Consumers will buy less of something if it becomes more expensive. Conversely, the law of supply states that the higher the price of a good, the more of it producers are willing to supply. It becomes more profitable to produce and sell a product when its price is high. These two laws work in opposition to push the price toward equilibrium.

The market equilibrium can be disrupted by external factors that cause a shift in either the supply or the demand curve. For example, a sudden increase in consumer income might increase demand for luxury cars, pushing their prices up. On the other hand, an improvement in manufacturing technology could increase the supply of smartphones, causing their prices to fall. Understanding these dynamics is essential for businesses, governments, and consumers to make informed economic decisions.