A demand function represents the quantity of a certain good or service that consumers are willing to purchase at different prices level. The law of demand states that there is an inverse relationship between price and quantity supplied (ceteris paribus).<u>Therefore, when the market price increases, the amount demanded drops. </u>
A supply function represents the quantity of a certain good or service that producers are willing to supply at different prices level. The law of supply states that there is a direct relationship between price and quantity supplied (ceteris paribus).Therefore, when the market price increases, so does the amount that producers desire to supply.
For a price level located above the equilibrium, the quantity demanded has decreased while the quantity supplied has increased. This is why it leds to an excess supply situation.
This is a perfect example of the market economy where the market is created and guided by the the forces of supply and demand. This example perfectly shows that as everything from the investment, production and distribution are guided by what the supply and demand dictate.
