Supply and Demand Prices in a Free Market System

Supply and Demand Demand Demand is the quantity of a good that people want to buy. In general, the higher the price of a good, the less people will want to buy it. The opposite is also true. The lower the price of a good, the more people will want to buy it. The Demand Curve on the next page shows the relationship between price and the quantity that is demanded:

Supply and Demand

Supply Supply is the amount of a good that producers are willing to make and sell in the market. In general, the higher the price of a good, the more producers will want to make. Producers of products usually do not want to make goods that are selling at relatively low costs. The Supply Curve on the next page shows this relationship:

Supply and Demand

Equilibrium Price In a free market system, prices are determined by the interaction of supply and demand. The price of a product will tend to adjust itself to a level where the amount demanded and the amount supplied is equal. At this point, the market price is said to be "at equilibrium." In a free market economy, the equilibrium price will constantly adjust itself to changes in supply and demand.

Supply and Demand In theory, the phenomena of equilibrium prices ensures that in a free marker system: –There are no surpluses. –There are no shortages. –Firms are encouraged to make the goods people want most. –Goods are made available at the cheapest possible price.

Supply and Demand The following chart shows where the equilibrium price is:

Supply and Demand Supply and Prices The equilibrium price will change as the level of supply changes. An increase in the total supply of a product is shown by drawing a new supply curve to the right of the old supply curve. By doing this, we can illustrate how when the supply of a good increases, the market sets a new equilibrium price which is lower than the old one.

Supply and Demand Sellers of the product will tend to shift their prices down to the new equilibrium, for example: A decrease in supply would have the opposite effect. We would illustrate that with a new supply curve to the left of the original supply curve.

Supply and Demand Demand and Prices The equilibrium price will change as the level of demand changes. An increase in the total demand for a product is shown by drawing a new demand curve to the right of the old demand curve. (on the next page) By doing this, we can illustrate how when the demand of a good increases, the market sets a new equilibrium price which is higher than the old one. Sellers of the product will tend to shift their prices up to the new equilibrium, for example: (see next page)

Supply and Demand A decrease in demand would have the opposite effect. We would illustrate that with a new demand curve to the left of the original demand curve.