Demand Dynamics and Shifters The demand curve reveals an inverse relationship between price and quantity, as lower prices encourage increased purchases while higher prices restrict them. This inverse relationship is driven by substitution choices, income restraints, and diminishing satisfaction with additional units. External factors such as consumer tastes, the number of buyers, prices of substitutes or complements, income variations, and future expectations shift the entire demand curve without altering its inherent price effect.
Supply Incentives and Influences The supply curve demonstrates a positive relationship, where higher prices motivate producers to supply more due to the lure of greater profits. Factors like production input costs, technological progress, government policies, the number of sellers, and future market expectations alter the overall supply while the price itself only moves along the curve. These determinants cause the supply to either expand or contract, thereby shifting the curve to the right or left respectively.
Market Equilibrium and Adjustment Mechanisms Equilibrium is achieved when the quantity demanded equals the quantity supplied, establishing a market-clearing price. Deviations from equilibrium result in shortages if demand exceeds supply or surpluses if supply surpasses demand, prompting natural price adjustments. Shifts in demand or supply—whether due to external information, cost changes, or production innovations—alter both the equilibrium price and quantity, highlighting the dynamic balance in a free market.