Demand and Supply
Demand is the quantity of a good that consumers are willing and able to buy at various prices over a given period. Supply is the quantity that producers are willing and able to sell at various prices. Demand backed by purchasing power is called effective demand.
The law of demand states that, other things being equal (ceteris paribus), when price rises the quantity demanded falls, and vice versa. The demand curve therefore slopes downward from left to right. This happens because when the price falls consumers can afford more and tend to switch from other goods to the cheaper one. The law of supply states that when price rises the quantity supplied increases, so the supply curve slopes upward.
Market Equilibrium
The equilibrium price is the price at which the quantity demanded equals the quantity supplied. At this level the market clears — there is neither surplus nor shortage. The amount traded at this price is the equilibrium quantity. At the equilibrium price there is no tendency to change because the plans of buyers and sellers match exactly.
Example
For a certain book, quantity demanded equals quantity supplied at 300 units when the price is RM15. Thus RM15 is the equilibrium price and 300 units is the equilibrium quantity.
Surplus and Shortage
If the price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. If the price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. Market pressure then pushes the price back towards equilibrium. The price mechanism automatically removes any surplus or shortage until the market clears again.
Shifts in Demand and Supply
Factors other than price can shift the whole curve. Demand is shifted by changes in income, tastes, the prices of related goods and the size of the population, while supply is shifted by changes in production costs, technology, taxes and subsidies, and the number of producers. For example, a rise in income or hot weather can increase demand (curve shifts right), raising both the equilibrium price and quantity. Conversely, higher raw-material costs reduce supply (curve shifts left), raising the equilibrium price but lowering the quantity. Demand-and-supply analysis therefore lets us predict how a given change affects price and quantity in the market.
Remember
A change in price moves along the curve; a change in other factors shifts the whole curve.