Key Points

The prices of all goods and services are determined by the interaction of two market forces: demand from buyers and supply from sellers.

Demand is the quantity of a product that consumers are willing and able to buy at a specific price. It is a desire that is supported by purchasing power.

The Law of Demand describes an inverse relationship between price and quantity demanded. As price decreases, the quantity people are willing to buy increases.

Besides price, demand is influenced by consumer income, tastes, seasonality, future price expectations, and the prices of related goods (substitutes and complements).

Supply is the quantity of a product that sellers are willing and able to offer for sale at a particular price.

The Law of Supply shows a direct relationship between price and quantity supplied. As the price of a good rises, producers are incentivized to supply more of it.

Factors other than price that affect supply include production technology, cost of inputs, number of sellers, and future expectations of price changes.

Market equilibrium occurs at the price where the quantity demanded by consumers equals the quantity supplied by producers. At this point, the market is considered 'cleared'.

When price is below equilibrium, there is excess demand (shortage). When price is above equilibrium, there is excess supply (surplus).

Real-world markets are dynamic, not static. Equilibrium is constantly shifting as factors like technology, weather, and consumer trends change.

The government intervenes in the economy to regulate unfair practices, protect consumers and workers, and ensure the provision of essential goods and services.

A price ceiling is a government-set maximum price for a good, like medicine. A price floor is a minimum price, such as a minimum wage for workers.

Public goods, like roads, parks, and national defense, are provided by the government because it is difficult for private companies to provide them profitably.

Excessive government intervention can lead to problems like price distortions, reduced incentives for producers, and heavy compliance burdens that discourage business.

Individual demand or supply refers to a single person or firm, while market demand or supply is the sum of all individual demands or supplies in the market.