Equilibrium
The Law of Supply and the Supply Curve
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.
General 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.
Supply, Demand, and Market Equilibrium
We begin our study of microeconomics by looking at a market with many buyers and sellers, i.e. a market where there is a large amount of competition. We will study such a market in more depth in Perfect Competition, as well as other market types, but starting here makes it easy to get a feel for how the subject works.