Economic equilibrium

When we have studied equilibria so far, it has always been so-called partial equilibria. (A partial equilibrium is one where we assume that “everything else is unchanged.”) However, we have also seen that a change in one variable can lead to changes in many other variables, so the restriction that everything else is unchanged may not be very realistic.

At the heart of economics lie three fundamental concepts: supply, demand, and market equilibrium. These forces shape prices, influence consumer behavior, and determine how resources are allocated in an economy. Whether you’re shopping for groceries, investing in stocks, or running a business, understanding these principles can help you make informed decisions.

The Law of Supply is a fundamental principle in economics that states:

• As the price of a good or service increases, the quantity supplied also increases.
• As the price decreases, the quantity supplied decreases.

This happens because higher prices make production more profitable, encouraging businesses to produce and sell more. Conversely, when prices drop, suppliers may reduce production because it becomes less profitable.