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The Forces of the Market: Supply and Demand

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In a free market economy, the price of goods and services is determined by the interaction of two fundamental forces: supply and demand. Supply refers to the quantity of a product that producers are willing to sell at a given price, while demand refers to the quantity that consumers are willing to buy. Generally, as the price increases, supply rises (producers want to sell more) but demand falls (consumers buy less).

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The point where the supply curve and the demand curve intersect is known as the equilibrium price. At this specific price point, the quantity of goods supplied exactly matches the quantity demanded. There is no waste and no shortage; the market is stable.

[Image of supply and demand curve graph]

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However, markets are rarely static. If the price is set above the equilibrium, a surplus occurs because producers supply more than consumers want to buy. To sell their excess inventory, producers must lower prices. Conversely, if the price is below equilibrium, a shortage occurs because demand exceeds supply. In this case, consumers are willing to pay more, driving the price up.

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External factors can also shift these curves. For instance, a technological breakthrough might lower production costs, increasing supply and lowering prices. On the other hand, a change in consumer trends might increase demand for a specific product, causing both the price and quantity sold to rise.