In modern macroeconomics, the market price of goods and services is derived from the interaction of supply, (the quantity of goods that a producer or a supplier is willing to bring into the market) and demand (the quantity that people are willing to purchase). An English economist Alfred Marshall in 1890 first published his writing, “The principles of economics”, which was one of the earliest writings on how supply and demand interacted to determine price. As of today, the supply and demand schedule is one of the fundamental concepts of economics.
The Law of Demand states that the higher the price, the lower the quantity demanded. It is individuals that derive how much is demanded in the market. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will logically avoid buying a product that will force them to relinquish the consumption of something else they value more. The demand curve is the graphical representation of the law of demand. The demand curve is a downward sloping curve from left to right, as it is a representation of the law of demand.
Supply refers to the amount of goods and services firms are able and willing to produce at a given level of prices over a period of time. Firms are responsible in the production of goods and services, and it does this by employing the factors of production. We assume that firms are guided by single motivation, that is, to gain as much as profit as possible. It is obvious that profit is directly related to prices and it then follows that higher prices means more profit for the firm.
A particularly known feature of market economies is the effect of the price mechanism on the demand and supply. The price mechanism determines equilibrium in the market by consisting of the interplay of the forces of supply and demand which determine the price at which commodoties are to be bought and sold in...