ABSTRACT
Figure 6.1 Interaction of demand and supply
expected to lead price to move towards P*Q*. Consider what would happen at any price away from this point. At P1, above P*, demand is QD1, less than supply QS1, suppliers are left with surplus goods to get rid of, and will have to lower the price to do so. At P2, below P*, demand is QD2 higher than supply at QS2. The result is a shortage of goods, and suppliers can increase prices and still sell what they want. Price can only be stable at the equilibrium point. At equilibrium, consumption is allocated to those willing to pay this price or more (those whose demands are illustrated to the left of the demand curve) and production to those willing
ness is illustrated to the left of the supply curve).
