Determining where Demand and Supply Meet for a Product or Service

Law of Demand and Supply

The law of demand states that all other factors being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.
The law of supply illustrates the quantities that will be sold at a certain price. Unlike the demand relationship, the supply relationship is a direct one.

Equilibrium

Equilibrium is the state where the supply of an item is equal to its demand. It is the point at which the demand and supply curves intersect on a graph.
At equilibrium, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.

Shifts in Demand and Supply

When either demand or supply changes, the equilibrium price and quantity will also change. This is referred to as a shift in demand or supply.
Demand shift factors include changes in tastes and preferences, number of consumers, price of related goods, income, and future expectations.
Supply shift factors include changes in input price, technology, expectations about the future, taxes and subsidies.

Price Elasticity

Price elasticity of demand is a measure used to show the responsiveness of the quantity demanded to a change in price.
If the elasticity of demand is greater than 1, it’s said to be elastic. This implies that changes in price have a more substantial effect on demand.
If elasticity is less than 1, it’s said to be inelastic. It means that changes in price have a less significant impact on demand.
Price elasticity of supply behaves in the same way but it refers to the responsiveness of the quantity supplied to a change in price.

The Role of the Market

The role of the market is to facilitate the exchange of goods and services. The interaction of buyers (demand) and sellers (supply) determines the market price and quantity of a good.
In a free market, the government does not interfere, and the price is set by the equilibrium point. In a pure free market, the role of the government is to protect property rights.
In practice, many markets are subject to some form of government regulation where the government may implement policies that change the outcome of the market.