Supply and demand theory Economics

July 10, 2017
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In the context of supply and demand discussions, demand refers to the quantity of a good that is desired by buyers. An important distinction to make is the difference between demand and the quantitiy demanded. The quantity demanded refers to the specific amount of that product that buyers are willing to buy at a given price. This relationship between price and the quantity of product demanded at that price is defined as the demand relationship.

supply is defined as the total quantity of a product or service that the marketplace can offer. The quantity supplied is the amount of a product/service that suppliers are willing to supply at a given price. This relationship between price and the ammount of a good/service supplied is known as the supply relationship.

When thinking about demand and supply together, the supply relationship and demand relationship basically mirror eachother at equilibrium. At equilibrium, the quantity supplied and quantity demanded intersect and are equal.

In the diagram below, supply is illustrated by the upward sloping blue line and demand is illustrated by the downward sloping green line. At a price of P* and a quantity of Q*, the quantity demanded and the supply demanded intersect at the Equilibirum Price. At equilibrium price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. This is the optimal economic condition, where both consumers and producers of goods and services are satisfied.

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