Abstract.
The paper discusses the two widely known concepts of economic and how they are of importance to both the consumer and the producer. The various factors that cause them have also been analyzed in a detailed way as well as their effect in the market. Graphical representations have been incorporated in order to enhance clarity of the theoretical discussion.
Introduction.
In economics and particularly microeconomics these two terms are used extensively. Demand refers to the quantity demanded by consumers at one point in the market and they are able and willing to pay for them at a given market price, supply on the other hand refers to the quantity that the suppliers are able and willing to offer to the market at a given price.
The article has in great depth discussed the various attributes of demand and supply, such their nature what causes their different characteristics and the various inferences that can be made from the demand and supply schedules and curves.
The article has also discussed the various determinants of supply and demand determinants. The integration of the two concepts in determining market equilibrium has also been mentioned in the article.
Demand according to Madeline ball and David seidman 2012, pg.9, “Demand is the buyer’s willingness to pay for a product. To put it simply, demand is desire plus money.”
Supply is the amount of commodities that the supplier is able and willing to supply to the market at a given price.
Demand according to Madeline ball and David seidman 2012, pg.10, price is where demand meets supply.
The two market concepts can thus be said to be models for determining price in a market. The two concepts in conjunction state that in a competitive market, the price of a unit quantity of a commodity will change until it arrives to appoint where the quantity demanded equal the quantity supplied and the suppliers and consumers are unanimous on the price of such quantities. This brings about the concept of equilibrium in quantities and prices of a commodity in the market.
These two economic concepts have led to the realization of four fundamental principles of demand and supply. These fundamental principles are founded from the integration of the two concepts in market situation. The fundamental principles are:
- Should an increase in demand occur while the supply remains unchanged this will lead to a shortage of quantity supplied this will lead to a higher.
- Should a decrease in demand occur while quantity supplied remain unchanged this will lead to a lower price.
- Should an increase in supply occur while demand remain unchanged this will lead to a increase In quantity supplied, this will lead to a lower price.
- Should a decrease in supply occur while quantity demanded remains unchanged this will cause a reduction in quality supplied which will lead to a higher price.
According to netba, 2013. The law of supply states that the higher the price, the larger the quantity supplied all other things held constant.
The law of demand states that, the quantity demanded is inversely related to price all other things held constant.
Supply schedule
Supply schedule is a tabular illustration of the illustration of the relationship between prices of a commodity with the quantity supplied. A supply curve is a graphical representation of such relationship as depicted in the supply schedule. The curve is upward sloping (has a positive gradient) and may be curvilinear or linear depending on the nature of such relationship. The upward sloping nature shows the positive relationship between the price and quantity supplied.
Supply Schedule
(Source: www.netba.com/econ/micro/supply/curve.)
Demand schedule.
This is a tabular illustration of the relationship between the quantity that the buyers are willing are able to purchase at any given time and at a particular price. Demand curve is the graphical representation of the demand schedule. The demand curve is downward sloping implying that it has a negative gradient which clearly tells us that the quantity demanded is inversely related to quantity demanded at any given time.
Demand Schedule
The demand curve for this example is obtained by plotting the data:
Demand Curve
(Source: www.netba.com/econ/micro/supply/curve.)
Determinants of supply and demand.
Determinants of supply.
Supply is determined by a set of various factors hereby referred to as supply determinants and they include:
- Production cost
This is the cost of producing the quantity being supplied by the suppliers in the market, when the relative price of production decreases with prices of such commodity remaining fixed, then the suppliers will be willing to produce more of the commodity causing an increase in the quantity being supplied in the market
- Technology
Technology id the technical know how employed in the production process when the technology is cost effective and leads to higher output, then the employers will embrace such means in their production endeavors leading to higher output which causes an increase in the quantity being supplied.
- Future prices expectation
Should future prices be expected to rise the supplier will produce more in order to increase their profit margins, this will lead to an increase in quantity being supplied, if future prices are expected to fall suppliers will produce less and thus there will be a decrease in quantity supplied.
If the number of competitors is higher and is increasing overtime this means that the quantity being supplied will be on the rise and if the number of competitors is decreasing then the quantity being supplied will be on the decline.
Determinants of demand.
Demand is determined by a set of various factors hereby referred to as demand determinants and they include:
- Income levels.
The level of income of an individual is a determining factor in demand. The income defines the purchasing power of an individual. When the part of income set aside for purchases of a given commodity increases than the quantity demanded increases as well. An increase in income will more often lead to an increase in demand but his is not always the case.
- Taste and preferences.
When a commodity is being preferred more than its substitutes, then its demand will automatically be on the rise.
- Prices of related goods
Related goods may be substitutes or compliments, if the goods are compliments then an increase in demand of the commodity will increase as the demand of the compliments increases and vice versa. If the commodities are substitutes, a decrease in their prices will cause a decrease in the demand of the commodity as consumers will not be willing to pay more for a commodity whereas its substitutes are selling cheaply. Tastes and preferences also work in a similar way as prices in this case.
- Consumer expectation about future prices.
If consumers expect that the future prices will increase they will buy more today to hedge against high prices in the future this will lead to an increase in demand now and a decrease in demand in the future and vice versa.
If the number of possible buyers is expected to increase then there will be an increase in demand and vice versa.
In conclusion the shifts in demand and supply is caused by the determinants mentioned above the shift depends on the sensitivity of the demand or supply to the variable. In a nut shell the two macro economic variables work together to bring about a point of price and quantity equilibrium in the market.
References:
Madeline, K.B and David, S. (2012). Supply and demand. New York: Rosen publishing group.
Determinants of demand. Retrieved from http://economics.about.com/od/demand-and-the-demand-curve/ss/The-Determinants-Of-Demand.htm.accessed 24th April 2013.
The law of supply. Retrieved from. www. netba.com/econ/micro supply/curve. Accessed 24th April 2013.
Determinants of supply and demand.Retrieved from petrarcanomics.wordpress.com//determinants-of-supply-and-demand.
Demand and supply schedules:retrieved from: http://www.netmba.com/econ/micro/demand/curve/
