Demand is how much buyers are willing and able to purchase at different prices.
Supply is how much sellers are willing and able to offer at different prices.
Equilibrium price
The equilibrium price is the price at which quantity demanded equals quantity supplied. At that point, the market clears without a shortage or surplus.
Basic rules:
- If price rises, demand usually falls.
- If price rises, supply usually rises.
- If demand increases, equilibrium price and quantity usually rise.
- If supply increases, equilibrium price usually falls while quantity rises.
This matters in finance because prices of goods, labor, and capital all respond to supply and demand conditions.