A demand curve is a graphical depiction of the law of demand. We plot price on the vertical axis and quantity demanded on the horizontal axis. As the figure illustrates, the demand curve has a negative slope, consistent with the law of demand.
The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa.
What price should the seller set and how many videos will be rented per month? The seller could legally set any price she wished; however, market forces penalize her for making poor choices. Suppose, for example, that the seller prices each video at $20. Odds are good that few videos will be rented. On the other hand, the seller may set a price of $1 per video. Consumers will certainly rent more videos with this low price, so much so that the store is likely to run out of videos. Through trial and error or good judgement, the store owner will eventually settle on a price that equates the forces of supply and demand.
In economics, an equilibrium is a situation in which:
- there is no inherent tendency to change,
- quantity demanded equals quantity supplied, and
- the market just clears.
At the market equilibrium, every consumer who wishes to purchase the product at the market price is able to do so, and the supplier is not left with any unwanted inventory.