Supply & Demand: How Markets Work The two basic terms used most often by economists are supply and demand . The amount of something that is available - the supply - and the amount of something that people want - the demand - make up a working market. The market is the way in which an economic activity is organized between buyers and sellers through their behavior and interaction with one another. Buyers as a group, determine the overall demand for a particular product at various prices. The interaction of buyers and sellers in the market helps to determine the market price, thereby allocating scarce goods and services efficiently. The price is taken into account when deciding how much of something to consume, and also how much to produce. The relationship between price and quantity demanded is so universal that it is called the law of demand . This law states that with all else equal, when the price of goods rises, the quantity demanded falls - and when the price falls, the quantity demanded rises. The supply curve provides the opposite information: the higher the price, the higher the quantity supplied - and the lower the price, the lower the quantity supplied. A key function of the market is to find the equilibrium price when supply and demand are in balance. At this price, the goods supplied are equal to what is being demanded thereby bringing about the most efficient allocation of the goods. An efficient allocation of goods in a market is one in which no one can be made better off unless someone else is made worse off. The “law of demand” works if ...

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Supply & Demand: How Markets Work

The two basic terms used most often by economists are supply and demand. The amount of something that is available - the supply - and the amount of something that people want - the demand - make up a working market. The market is the way in which an economic activity is organized between buyers and sellers through their behavior and interaction with one another.

Buyers as a group, determine the overall demand for a particular product at various prices. The interaction of buyers and sellers in the market helps to determine the market price, thereby allocating scarce goods and services efficiently. The price is taken into account when deciding how much of something to consume, and also how much to produce.

The relationship between price and quantity demanded is so universal that it is called the law of demand. This law states that with all else equal, when the price of goods rises, the quantity demanded falls - and when the price falls, the quantity demanded rises. The supply curve provides the opposite information: the higher the price, the higher the quantity supplied - and the lower the price, the lower the quantity supplied.

A key function of the market is to find the equilibrium price when supply and demand are in balance. At this price, the goods supplied are equal to what is being demanded thereby bringing about the most efficient allocation of the goods. An efficient allocation of goods in a market is one in which no one can be made better off unless someone else is made worse off.

The “law of demand” works if ...

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