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Law of Demand , Law of Supply, and Equilibrium

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Submitted By Veronicafranco81
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Supplemental Unit 1. Demand, Supply, and Adjustments to Dynamic Change
Note: The authors recommend that this feature be read along with Part I, Elements 6, 7, and 11 of Common Sense Economics.
Common Sense Economics highlights how markets work and their impact on the allocation of resources. This feature will investigate this issue in more detail. It will use graphical analysis to analyze demand, supply, determination of the market price, and how markets adjust to dynamic change.

The law of demand states that there is a negative relationship between the price of a good and the quantity purchased. It is merely a reflection of the basic postulate of economics: when an action becomes more costly, fewer people will choose it. An increase in the price of a product will make it more costly for buyers to purchase it, and therefore less will be purchased at the higher price.
The availability of substitutes—goods that perform similar functions—underlies the law of demand. No single good is absolutely essential; everything can be replaced with something else. A chicken sandwich can be substituted for a cheeseburger. Wheat, oats, and rice can be substituted for corn. Going to the movies, playing tennis, watching television, and going to a football game are substitute forms of entertainment. When the price of a good increases, people will turn to substitutes and cut back on their purchases of the more expensive good. This explains why there is a negative relationship between price and the quantity of a good demanded.
Exhibit 1 provides a graphic illustration of the law of demand. Price is measured on the Y-axis and quantity on the X-axis. The demand curve will slope downward to the right, because when the price falls, consumers will purchase a larger quantity.
Correspondingly, an increase in price will cause buyers to reduce the quantity of their...

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