Demand and supply in microeconomics is the reigning mechanism that determines the price of a good or service in a market. According to neoclassical economics, the price and quantity traded will, in the long run, be determined by point where demand is equal to supply - the equilibrium. The forces that draw a deviated price back to equilibrium is self correcting. The demand and supply curves are defined as the relationship between the price, and the quantity demanded and quantity supplied.
The law of supply, in microeconomics, states that when the price of a good increase, then the quantity supplied of that good will increase. The converse is also true. The law of demand states that when the price of a good increases, the demand of the good will decrease. The laws of supply and demand can be represented in graphs by movements in the supply and demand curves. Changes in quantity demanded as a function of price is seen in the movement along the demand curve. When the entire demand curve shifts, this is described as a change in demand. Changes in quantity supplied are referred to as movements along the supply curve. When the entire supply curve shifts, it is known as a change in supply.
Some of the factors that cause a demand curve to shift are:
1. Changes in consumer taste or preferences – if consumers lose interest in a product, demand will decrease
2. Changes in income – if consumer income increases then it is expected that demand for certain goods will increase
3. Distribution of income
Some of the factors that cause a supply curve to shift include:
1. Cost – Changes in technology can decrease costs and increases in manufacturing costs cause the supply curve to shift up and to the left
2. Number of producers – if the amount of firms who product a certain product increases, supply will increase
3. Government tax policy – Increases in business taxes will make the supply curve shift up and to the left
Demand and supply are central to the understanding of microeconomics, and economics as a whole. Factors that influence demand and supply can have an effect on the success of a firm or product.