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The Law of Supply and Demand

Updated on November 18, 2009

 

In the market, supply and demand interact freely. Supply is represented by producers or sellers while demand is represented by buyers. Producers are willing and able to offer more goods at higher prices. This is the law of supply. On the other hand, buyers are willing and able to purchase at lower prices. This is the law of demand. There is therefore a contradiction between the two parties. One likes high price while the other likes low price. At a high price, sellers offer more goods because they are encouraged. But buyers are able to purchase less goods. The result is a surplus of goods. This means quantity, supplied is greater than quantity demanded. To sell the surplus goods, sellers compete with one another in decreasing their price. Buyers can take more goods at a lower price. But producers are discouraged to produce and offer goods at a very low price. The result is shortage of goods. This means quantity demanded is greater than quantity supplied. Such situation compels many buyers to pay a higher price to get the available goods. In the process of interaction between buyers and sellers, an equilibrium price (meaning in balance or at rest) is established. This is a situation where quantity supplied and quantity demanded are equal. There is no surplus nor shortage.


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