The theory of supply and demand explains how the price and quantity of goods sold in markets are determined. The supply and demand theory is simple and makes sense. People act in there own self interest, and want the best quality at the lowest possible price. The tension between competing producers, trying to meet the needs of the market, produces the highest quality goods at the lowest possible prices. The development of a price of a good has to do with peopleâ€™s willingness to buy and sell. The price of a good clearly reflects what people are willing to do.
At each price, the quantity demanded is the maximum quantity buyers want to buy at that price. The demand price for a good reflects its marginal benefit to buyers. It is the highest price buyers would pay for the last unit of the particular quantity of the good. The law of demand states that, if all other factors remain equal, the higher the price, the less people will demand a good. In other words, the higher the price, the lower the quantity demanded. The amount buyers purchase at a higher price is less because, as the price of a good goes up, so does the opportunity cost of buying that good. People will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The demand curve illustrates the negative relationship between price and quantity demanded; thus the demand curve is a downward slope. The higher the price the less the quantity demanded, and the lower the price, the more quantity will be demanded. An important distinction in the demand curve is between movements along the demand curve and shifts in the demand curve. Movements along the demand curve refers to moving along a given demand curve, tracing out the effects that different prices have on the quantity of goods people want to buy. The demand curve is unchanged. Shifts in the demand curve refer t