Economics Terms A-Z - The most important terms in economics.

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Economics Terms A-Z

Supply and Demand

“Supply and demand” is probably one of the first things people learn about economics. Supply refers to the quantity of a product or service being sold, while demand refers to the quantity consumers wish to buy.

A basic economic idea is that the price for a good or service will eventually settle at a point when its demand and its supply are equal (assuming all other factors remain equal). This is referred to as the equilibrium. Our article on market equilibrium describes how this process works in the economy.

The consumer side of market equilibrium is demand. It depends, with all other factors being equal, on the price of the commodity. Of course, all other factors are never constant: other goods in the market, the preferences of consumers, and many other things influence the demand for a good.

The demand curve generally slopes downward, showing that consumers want more of a product when it is cheaper, and less when it is more expensive. Quantity demanded is also dependent on many other factors: whether complements or substitutes are available, the amount of income the consumer has, the elasticity of demand, and more. 

Meanwhile, the supply curve typically slopes upward. This shows that firms like to sell goods that have higher prices, and will offer to sell a large quantity of a good if the price is high. But when the price is low, firms offer less of the good for sale. Other factors that influence supply include production costs, the difficulty of competition, the presence of taxes or subsidies, and more.

For more about supply and demand, and how they interact, see our article about Market Equilibrium.