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{{main|Supply and demand}}

[[Image:Supply-demand-right-shift-demand.svg|thumb|right|The [[supply and demand]] model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D₁ to D₂ along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).]]

In [[microeconomics|microeconomic theory]]economics, the theory of supply- and- demand [[modelis (economics)|model]]an isorganizing intendedprinciple to explain orprices predictand thequantities priceof goods sold and quantityto soldchanges thereof in a perfectly[[market]] competitiveeconomy. In [[marketmicroeconomics|microeconomic theory]], it refers to price and output determination under [[perfect competition]]. It alsoThis has servesserved as a standard for other market structures and for other theoretical approaches.

For a given market of a [[Good (economics and accounting)|commodity]], ''demand'' shows the quantity that the prospective buyer(s) would be prepared to purchase at each unit price of the good. Demand is often represented as a table or a graph relating price and quantity demanded (see boxed figure). [[consumer theory|Demand theory]] describes each consumer as "[[rational choice theory|rationally]]" choosing the ''most preferred'' quantity of each good, given income, prices, etc. A term for this is 'constrained [[utility]] maximization' (with income as the "constraint" on demand). Here, 'utility' refers to the (hypothesized) preference relation for each respective consumer.<ref>Böhm, Volker and Haller, Hans (1987). "demand theory," ''The [[New Palgrave: A Dictionary of Economics]]'', v. 1, p. 785.</ref>. It indicates the quantity that the consumer would be willing to buy at each price.

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The '''law of demand''' states that, in general, price and quantity demanded in a given market are inversely related. In other words, the higher the price of a product, the less of it people would be willing buy of it (other things [[ceteris paribus|unchanged]]). There are other factors that could affect demand, for example an increase in income. These can be represented by a ''shift'' of the demand curve, as in the figure.

''Supply'' is the relation between the price of a good and the quantity available for sale from suppliers (such as producers) at that price. Supply is often represented as a table or a graph relating price and quantity ''supplied''. Producers are hypothesized to be profit-maximizing, attempting to produce the amount of goods that will bring them the greatest profit. The '''law of supplySupply''' statesis thatoften represented as a directly proportional relation between price and quantity supplied are directly proportional (other things unchanged). In other words, the higher the price at which the good can be sold, the more of it producers will supply. The higher price makes it profitable to increase production. The model predicts that for given supply and demand, price and quantity will stabilize at the price that makes quantity supplied equal quantity demanded. This is at the intersection of the two curves in the graph above, [[market equilibrium]]. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This pulls the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down.

For a given quantity of a good, the price point on the demand curve indicates the ''value'', or [[marginal utility]], to consumers for that unit of output. That value measures what consumers are willing to pay for the corresponding unit of the good. The price point on the supply curve measures a certain kind of ''cost'', called ''[[marginal cost]]'', for production of that unit of output. It is the amount producers would have to receive to keep profits from declining with the additional output. The price in equilibrium is determined by supply and demand. In a [[perfect competition|perfectly competitive market]], supply and demand equate cost and value "at the margin," that is for the last unit produced to reach equilibrium.<ref name="Hicks">{{cite book | title=[[Value and Capital]]| last=Hicks| first=John Richard| authorlink=John Hicks| date=1939| publisher=Oxford University Press. 2nd ed., paper, 2001| ___location=London| id=ISBN 978-0198282693}}</ref>