Question

Explain the concepts of supply and demand in a free market. 

Answer 1

In a free market, it is the demand and supply forces that help achieve equilibrium quantity and price in the market. Demand forces involve those entities including households, that create demand for the products and services. It is downward sloping as with increase in price, quantity demanded decrease and vice versa. Supply forces involve entities including firms that produce goods and service and supply them in the market. Supply curve is upward sloping. It means that with increase in price, quantity supplied increases and vice versa. The intersection point of demand and supply curve identify the equilibrium price and quantity at the equilibrium. It is the equilibrium in the free market. When price is set above the equilibrium point, then it creates surplus and puts downward pressure on the price. when price is set below the equilibrium price, then it creates shortage in the market and puts upward pressure upon the price. It helps re-achieve the equilibrium in the free market. Further, in the free market, it is the demand that creates supply in the market.