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In economics, supply and demand describes market relations between prospective sellers and buyers of a good. The supply and demand model determines price and quantity sold in a market. This model is fundamental in microeconomic analysis, and is used as a foundation for other economic models and theories. It predicts that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity. The model incorporates other factors changing equilibrium as a shift of demand and/or supply. Strictly speaking, the model of supply and demand applies to a theoretical type of market called perfect competition in which no single buyer or seller has much effect on prices, and prices are known. The quantity of a product supplied by the producer and the quantity demanded by the consumer are dependent on the market price of the product. The law of supply states that quantity supplied is related to price. It is often depicted as directly proportional to price the higher the price of the product, the more the producer will supply, ceteris paribus ("all other things being equal"). The law of demand is normally depicted as an inverse relation of quantity demanded and price the higher the price of the product, the less the consumer will demand, ceteris paribus. The respective relations are called the supply curve and demand curve, or supply and demand for short. The supply-and-demand model (sometimes described as the law of supply and demand) posits that a market tends toward equilibrium price and quantity of a commodity at the intersection of consumer demand and producer supply. At this point, quantity supplied equals quantity demanded (as shown in the figure[1] ). If the price for a good is below equilibrium, consumers demand more of the good than producers are prepared to supply. This defines a shortage of the good. A shortage results in producers increasing the price until equilibrium is reached. If the price of a good is above equilibrium, there is a surplus of the good. Producers are motivated to eliminate the surplus by lowering the price, until equilibrium is reached. The supply schedule, graphically represented by the supply curve, is the relationship between market price and amount of goods produced. In short-run analysis, where some input variables are fixed, a positive slope can reflect the law of diminishing marginal returns, which states that beyond some level of output, additional units of output require larger amounts of input. In the long-run, where no input variables are fixed, a positively-sloped supply curve can reflect diseconomies of scale.
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