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Chapter 21: Demand and Supply

Chapter Overviews

In a market economy, supply and demand determine how much of something is sold and bought and at what price. Demand means that consumers have the desire, as well as the ability, to buy a good or service. Supply refers to the amount of the good or service that producers are prepared to sell at all market prices. Surpluses and shortages work together with supply and demand to establish prices.

The law of demand states that the higher the price of a good or service the lower the demand will be for that good or service. The quantity of an item demanded and its price usually move in opposite directions. This movement can be tracked in a demand curve. The demand for an item will exist when a consumer wants that item and has the means to buy it. There are a number of factors that affect demand, including changes in the number of consumers, the income of the consumers, and the consumers' tastes.

Another factor of a market economy is supply. Supply is the amount of a good or service that producers are willing and able to sell. A supply curve slopes upward to show that suppliers are more willing to offer more goods at a higher price and fewer goods at a lower price. Like demand, there are a number of factors that affect supply, including cost of resources, productivity, technology, government policies, and the number of sellers.

When demand and supply are not balanced, a surplus or shortage of a good or service may exist. By analyzing supply and demand together, we can arrive at a market price. These prices help businesses and consumers make decisions. They also help to answer economic questions, such as what to produce, how to produce, and for whom to produce.

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