Supply and demand

The price of a product is determined by a balance between production at each price (supply) and the desires of those with purchasing power at each price (demand). The graph shows an increase in demand from D₁ to D₂, along with a consequent increase in price and quantity sold of the product.

Supply and demand is a model of microeconomics. It looks at how a price is formed. This is done because producers and consumers interact with each other. This will fix the price for a certain type of good. In Perfect competition the quantity demanded (demand) and the quantity supplied will be equal. This will fix the price. There will be economic equilibrium.

When there is more supply, this will cause prices to fall because people will not want to pay more for items that can be found easily. When there is more demand, prices will go up because many people want to buy the same item but there is not enough supply for it.

When demands for new goods and services go up, new markets come into being. The greater the demand, the faster this happens. This greater number of providers makes the supply go up, which forces the price down toward the cost of production and distribution.

Alfred Marshall first described the model.

Other websites

• "Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and Demand Geometry" by Thomas Humphrey (via the Richmond Fed)
• Supply and Demand book by Hubert D. Henderson at Project Gutenberg.
• Price Theory and Applications by Steven E. Landsburg ISBN 0-538-88206-9
• An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, 1776 [1]
• By what is the price of a commodity determined?, a brief statement of Karl Marx's rival account [2]