The demand for and supply of economic goods determine “ceteris paribus”, the price that will be asked. With increasing demand and less supply, it will generally be the case that the price rises. The other way round, the price will decrease with decreasing demand and an increasing supply. As a result of this effect, equilibrium between supply and demand will automatically come about in the equilibrium price.
Law of supply and demand
The law of supply and demand means that on a competitive market the price of a product comes about under the influence of the actions of buyers (buyers, consumers) and sellers (suppliers, producers). The price evolves to that level where requested and offered quantities are equal. If the supply exceeds the demand, the producers will remain with an oversupply that they will only be able to sell if they are willing to ask for a lower price.
So there is a downward pressure on the price in that case. If the demand is greater than the supply, then there remainconsumers ask for the product when the total production has been sold. If they still want the product, they will then have to be prepared to pay a higher price, indicating an upward pressure on the price.
In the figure alongside, supply and demand are schematically shown. When the price of a product rises, the requested quantity of this product will decrease, because fewer people will have this higher price for the product. The supply will increase, however, because at a higher price it is profitable for more producers to start producing the product. With linear supply and demand functions, there is only one point where they intersect.
This is the market equilibrium (market equilibrium): the price and quantity that are created on a free market. One reads these prices by looking at the position on the price and quantity axis from the point of intersection (via the dashed line).
If the supply curve shifts parallel to the right, more products are offered at the same price. If the supply curve shifts parallel to the left, fewer products will be offered at the same price.