Laws of Demand and Supply

Law of Demand

Describes the inverse relationship between price and quantity demanded: Higher price = contraction in demand; Lower price = expansion in demand.

Inverse Relationship

Consumers buy more of a product at lower prices and less at higher prices, driving the law of demand.

Law of Supply

States the positive relationship between price and quantity supplied: Higher prices = more supply; Lower prices = less supply.

Reason for Law of Supply

If price increases and cost of production remains the same, profit margins increase, incentivizing producers to supply more.

Increase in Price Impact

An increase in price typically decreases quantity demanded (contraction) and increases quantity supplied (expansion), potentially causing a surplus.

Decrease in Price Impact

A decrease in price typically increases quantity demanded (expansion) and decreases quantity supplied, as producers are less inclined to supply.