Quantity

Price

Quantity

The relationship between demand and supply in the free-market economy can also be illustrated graphically.

Figure 3.3 Demand and supply curves.

S

E

D

Let us study Figure 3.3. The decisions of consumers (buyers) are represented by the demand curve (D) and the decisions of producers (sellers) are represented by the supply curve (S). Demand and supply are regulated through prices: the lower the price the more goods and services will be bought by consumers (demand curve). The higher the price the more goods and services will be

produced by producers (supply curve). Prices and quantities of goods ‘ adjust themselves ’ until supply meets demand and then we say that the market is in equilibrium (point E).

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