Question

Briefly explain demand and supply and how the interactions of the buyers and sellers work toward eliminating surpluses and shortages?

Answer 1

The law of demand states that there is an inverse relationship between quantity demanded and price, other things remaining the same.

The law of supply states that there is a direct relationship between quantity supplied and price, other things remaining the same.

Market equilibrium occurs at the intersection of quantity demanded and quantity supplied.

When there are higher prices and excess supply, producers will have excess inventories and the competition among them will put the downward pressure on price as there will be some suppliers who will be willing to supply at lower prices. As prices fall, the consumer demand will increase until it finally settles at the equilibrium price.

When there are lower prices and excess demand, there will shortage of goods, putting an upward pressure on the price as there will be more buyers chasing the available goods. As price increases the suppliers will start producing more but the demand from buyers will decrease. This will drive the price and quantity to its equilibrium level.