91Ó°ÊÓ

The concepts of supply and demand form the backbone of a market economy. These curves explain how prices are determined in a market.
A **demand curve** reflects how much of a product consumers are willing to buy at different prices. It usually slopes downward from left to right, indicating that lower prices generally lead to higher demand. On the other hand, a **supply curve** depicts how much a product sellers are willing to sell at varying prices, often sloping upward because higher prices incentivize more supply.

To illustrate:

• As the price of coffee decreases, consumers may want to buy more, moving down the demand curve.
• Conversely, as the price of coffee increases, sellers are more inclined to offer additional quantities, moving up the supply curve.

A market without intervention naturally reaches an **equilibrium point** where supply equals demand. In this state, there is no tendency for the quantity to adjust unless new external factors influence either curve.

The equilibrium price is a critical measure in economics. It represents the price at which the quantity of a product demanded by consumers matches the quantity supplied by producers.
With an equilibrium price, the market clears, meaning every unit of the product put on the market by sellers is purchased by buyers.

The equilibrium price ensures:

• There are no leftover goods or unmet demand.
• Market stability, with no inherent pressure for the price to change unless either the demand or supply curve shifts due to external factors such as changes in consumer preferences or production costs.

In graphical terms, it is the point where the demand and supply curves intersect.

Importantly, when a price floor is implemented above this equilibrium price, it results in a surplus because it disturbs this natural balance.

Economic surplus occurs when market conditions lead to supply exceeding demand. This scenario often arises under the influence of a price floor – a minimum price that can be legally charged and is typically set above the equilibrium price.

Under these conditions:

• Sellers produce more than consumers are willing to buy at that price, moving up the supply curve.
• Simultaneously, buyers purchase less than they would if the price floor weren't present, moving down the demand curve.

This results in an excess supply, commonly referred to as a surplus.

While consumers benefit from more consistent pricing for essential goods, there are drawbacks like wasted resources or enforced purchase reductions.

Thus, understanding economic surplus helps policymakers weigh the benefits of price interventions against potential inefficiencies and market distorts.