Supply and demand are at the heart of economics. Almost every transaction can come down to these two variables which have an overarching impact throughout society. From healthcare to chocolate bars – there is a constant fight to reach economic equilibrium whereby supply and demand meet.
Market equilibrium occurs when demand and supply meet. At this point, producers of a good are selling exactly how much they produce and consumers are buying exactly how much they want. Most importantly, this comes at a price that both parties are agreeable to.
A price ceiling is the maximum amount a producer can sell their good or service for. This is usually mandated by government in order to ensure consumers can afford the relevant goods and services. Examples include, food, rent, and energy products which may become unaffordable to consumers.
A price floor is a minimum price set on goods and services usually determined by the government. This makes it illegal for any company or individual to sell its goods or services below the set minimum price.
The law of supply simply refers to the relationship between prices and supply. As prices increase, so too does supply. If prices fall, then supply will also fall. However, it is important to note that this only applies ceteris paribus.
The law of demand refers to how demand changes in reaction to price. So when prices rise, the law of demand dictates that demand will fall.
