Supply and demand

In economics, demand describes how much of a good or service consumers are willing and able to buy at each possible price during a given period. Supply describes how much producers are willing and able to offer at each price. A particular quantity demanded or supplied is one point on the respective relationship; demand and supply refer to the full range of price–quantity combinations. With other influences held constant, the law of demand says that a higher price generally reduces the quantity buyers choose, while the law of supply says that a higher price generally encourages producers to offer more. These relationships are commonly shown as demand and supply curves.

In the basic model, the point where the demand and supply curves intersect is the market equilibrium. At its equilibrium price, the quantity buyers plan to purchase equals the quantity producers plan to sell; this is the equilibrium quantity. At a price below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. At a price above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Competitive-market models describe pressures that can move prices toward a balance, but the speed and path of adjustment vary across actual markets.

A change in a good's own price is represented as movement along its existing curve. A change in another factor can shift the curve itself. Demand may shift as income, preferences, population, expectations, or prices of related goods change. Supply may shift when production technology, input costs, resource availability, taxes, or the number of sellers changes. A shift changes the equilibrium price and quantity; when supply and demand shift at the same time, the result depends on the direction and size of both changes.

Supply-and-demand analysis helps economists and policymakers organize questions about prices, production, shortages, and the effects of changes such as a new technology or a supply disruption. It is a model, not a claim that every market is perfectly competitive or that prices instantly settle at a single point. Regulation, price controls, market structure, expectations, and multiple shocks can affect outcomes. The model's predictions therefore depend on its assumptions and on which factors are changing.