Definition of "Supply and Demand" in Economics

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Definition of "Supply and Demand" in Economics
Supply and demand affect the value of goods. (Image by Flickr.com, courtesy of borman818)

"Supply and demand" is a crucial concept in economics. It dictates both how much of a product is needed in the marketplace and at what price it should be offered.

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"Supply and Demand" Defined

According to Dictionary.com, "...The relation between these two factors [supply and demand] determines the price of a commodity. This relationship is thought to be the driving force in a free market. As demand for an item increases, prices rise. When manufacturers respond to the price increase by producing a larger supply of that item, this increases competition and drives the price down. Modern economic theory proposes that many other factors affect price, including government regulations, monopolies, and modern techniques of marketing and advertising."

What Is "Demand"?

"Demand" is the market's appetite for a certain product. As more of a product is desired, more supply is required. If more supply is not available the price generally goes up.

What Is "Quantity Demanded"?

"Quantity demanded" refers to the amount of a certain product that is desired at a given price point: If 10 widgets are wanted and 20 are available at £6 each, changing the price to £3 each could increase the demand to 50 widgets at that price--completely altering the supply:demand ratio.

Supply-and-Demand Relationship

As stated in the previous example, as price drops, scarcity rises or both, the quantity demanded will generally increase. Conversely, if price rises, scarcity drops or both, the quantity demanded will generally decrease.

Equilibrium

Equilibrium is a concept that dictates the intersection of supply and demand on a graph. When supply is equal to demand at a given price point, the market has reached equilibrium for that product.

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