Demand and Supply

Microeconomics studies how individual households and firms make choices and how those choices interact in markets. At the heart of the subject sits the model of demand and supply, which explains how prices are formed and how resources are allocated when buyers and sellers meet.

The law of demand

Demand is the quantity of a good that consumers are willing and able to purchase at each possible price during a given period. The law of demand states that, holding all other factors constant (the ceteris paribus assumption), a rise in price leads to a fall in quantity demanded, and vice versa. This inverse relationship is drawn as a downward-sloping demand curve, with price on the vertical axis and quantity on the horizontal axis. Two effects explain the negative slope: the income effect (a highe