How Does Demand and Supply Affect All Businesses?
Economists use the model of supply and demand to analyze competitive market. Combination of the two sides of the market with each other creates the equilibrium price and the equilibrium volume and market equilibrium. A competitive market is characterized by a large number of buyers and sellers, each of which either has little effect, or no effect on the market price (Boundless, n. d.).
Qualitative characteristic of the market equilibrium is that the market is balanced in this situation, i.e. neither sellers nor buyers have incentive to imbalance. Conversely, if the market is not in equilibrium, there is a desire to change the situation on the market either from the sellers or buyers. If the price is greater than the equilibrium price, sellers are faced with oversupply and prefer to lower the price. The result will be an increase in demand and decrease in supply, a gradual transition to the market equilibrium. If the price is below the equilibrium price, the demand will exceed supply, and some buyers prefer to pay a higher price in order to get this product. As a result, there is price increase, which will be accompanied by a decline in demand and increase in supply, and finally, the market will return to a state of equilibrium (Mankiw, 2014).
Thus, with the interaction of supply and demand in the market, the situation of unmet demand, namely the deficit (demand volume exceeds the volume of supply), and the excess of supply, namely the surplus (supply volume exceeds the volume of demand), are possible (Boundless, n. d.).
In the case of deficiency on the sellers’ market, feeling that at that price the quantity demanded exceeds the proposal will have incentives to sell more goods at a higher price. The opposite situation occurs with an excess, when producers want to sell more of the quantity of goods that consumers want to buy at the current price. Due to this, the shortage of product usually leads to an increase in its price, and the excess – to decrease (Mankiw, 2014).
References
Boundless (n. d.). Impacts of Supply and Demand on Businesses. Retrieved from https://www.boundless.com/business/textbooks/boundless-business-textbook/economics-and-business-2/introduction-to-economic-systems-27/impacts-of-supply-and-demand-on-businesses-151-7840/ [Accessed: 11 January 2017]
Mankiw, N. G. (2014). Principles of Macroeconomics. Boston: Cengage Learning.
