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Law of supply and demand

In economics, the law of supply and demand is an economic model that states the equilibrium price and quantity of a product is at the intersection of the consumers demand and the producers supply.

Expanded Definition

Strictly speaking, this only applies to a perfectly competitive market in which the price is determined just by the amount supplied and the amount demanded. In other words, the buyer and seller do not have much effect upon the price and the price is known.

If demand drops, then the quantity supplied is in excess (a surplus) and the price and supply will drop until equilibrium is reestablished. Conversely, if demand rises, then the quantity supplied is insufficient (a shortage) and the price and supply will rise until equilibrium is reached again.

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