Supply and Demand
Introduction
Supply and demand is a fundamental concept in economics that describes how the price of goods and services is determined in a market economy. It is based on the theory that the price of a product will adjust until it settles at a point where the quantity demanded by consumers (at current price) equals the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.
Law of Supply
The law of supply states that, all else being equal, an increase in price results in an increase in the quantity supplied. In other words, producers are willing to offer more products for sale on the market at higher prices. This relationship between price and quantity supplied can be graphically represented by an upward-sloping supply curve.
Law of Demand
Conversely, the law of demand states that, all else being equal, as the price of a product increases, quantity demanded falls. Likewise, as the price of a product decreases, quantity demanded increases. This relationship between price and quantity demanded is typically represented by a downward-sloping demand curve.
Equilibrium
The point at which the supply and demand curves intersect is known as the equilibrium price and quantity. At this point, the quantity of goods demanded by consumers equals the quantity of goods that suppliers are willing to supply. The market is said to be at equilibrium. If the market price is above this point, there will be a surplus of goods, causing the price to fall. If the market price is below this point, there will be a shortage, causing the price to rise.
Shifts in Supply and Demand
A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. Factors that can shift the demand curve include changes in income, trends and tastes, prices of related goods, expectations about future prices and income, and number of potential consumers. Factors that can shift the supply curve include changes in production costs, technological progress, prices of related goods, expectations about future prices, and number of potential suppliers.
Price Elasticity
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.
Conclusion
Understanding the laws of supply and demand are fundamental to understanding how the capitalist economy operates. Supply and demand influences everything from the price of goods and services to the resources companies invest in to produce those goods and services.