Executive summary
Demand and supply is the basic concept of economics and hence it is the backbone of market economies around the world. Demand implies the willingness and potential on the part of a consumer to purchase a product at a specified price while supply indicates the quantity of the same product available in the market for sale. The price is a major factor determining the demand for a product in the market even though the consumer’s income and preference along with the price of certain other complementary products tend to influence the price. Supply of a product in the market is also determined by its price as sellers are interested in supplying the market with more quantity of the product when the price is high. Other factors that restrict the suppliers include cost of production and a variety of external factors. When the demand and supply of a product becomes equal an equilibrium price results. Beyond the equilibrium point if the demand for a product increases without any increase in the supply, traders will increase the price to reach equilibrium. Similarly, if the supply exceeds the demand the sellers will reduce the price to maintain equilibrium. This law of supply and demand is the foundation for understanding the price change in the market. Historically, marketplaces around the world were dominated by sellers as there were only a handful of manufacturers involved in producing and marketing commodities. However, in light of the vast changes in consumer preference and heavy competition driven by innovation today, business organizations that cannot adapt to change no longer survive in the consumer market. In other words, buyers drive product demand while sellers drive its supply (Kash, 2002). More often, the relationship between price and demand is paradoxical. For instance, increase in demand tends to increase the price of a commodity while at the same time increase in price decreases the demand. However, as the demand continues to remain high it gives opportunity for new entrants to enter the market place and still keep the price affordable to consumers.
Introduction
The quantity of a particular good available in the market is called the supply. Similarly, the quantity of a good customers want to buy is called the demand. For instance, consider an essential commodity people require on a regular basis for consumption, wheat. If the demand for wheat among the public is high, while on the other hand the supply is less, the price of wheat in the market is likely to shoot up. However, when conditions change either by bringing in more wheat from an outside market or people prefer an alternate food product readily available in the market, say rice, the demand for wheat gradually goes down. Both supply and demand of a commodity in a market determines the price. Typically, in a competitive consumer market the unit price of a particular product goes on changing until settling at a specific point where the quantity demanded by the end users equals the quantity supplied to the market, resulting in an economic equilibrium (Varian, 2010). Supply and demand continue to remain in equilibrium until the variables are acted upon by external forces. Supply of a product in the market is influenced by various external factors. The price and cost of production are two primary factors influencing the supply. For instance, the supply of a product increases as its price increases and vice-versa; at the same time, an expectation about a future price rise tends to decrease the current supply. Also, the cost of production of a consumer good is inversely proportionate to the supply as a seller is likely to supply a limited quantity of a product owing to the increased cost of production. Cost of production of a commodity is dependent on a number of external factors like price of raw materials, wage rates of workers, government regulations and transport expenses. Likewise, demand of a product is determined by consumer preference, income and price change of related goods, among various other factors. For example, a change in consumer preference influenced by advertisements and life style, the purchasing power of individuals and change in prices of a substitute, say tea for coffee, determine the demand of a consumer product in the market.
Conclusion
The basic assumptions of economics include: customers tend to maximize the utility of the goods and services they buy while on the other hand business companies try to maximize their profit through selling to customers. Thus, utility of the goods and services from the perspective of consumers and profit-making from the standpoint of the sellers are closely linked to the market price of commodities. Demand and supply are the two variables that affect the price of commodities in the market. A market comprises of a number of buyers and sellers. No individual buyer or seller can influence the price of a commodity in a competitive market. Demand for a product or service in a market is the quantity of a particular commodity customers are willing to buy while the quantity of a commodity sellers are willing to sell in a market is the supply. When the demand and supply are equal an economic equilibrium is achieved and the price of a commodity at the point of equilibrium does not change unless influenced by an external factor. Ordinarily, an increase in demand while the supply remains unchanged leads to a higher price. On the other hand, when the demand decreases even as the supply remains the same the prices tend to fall. More importantly, a higher price encourages the supply while restricting the demand as a lower price encourages the demand while restricting the supply. In other words, all human behaviors are influenced by price in some way (Wheelan, 2010). For instance, when the price of a commodity falls down, individuals are more likely to buy it than when the price of the same commodity increases. This explains why a reduced price of a particular item during a discount sale in a particular season of a year increases the demand for the product.
References
Kash, R. (2002). The new law of demand and supply. New York: Random House Inc.
Varian, H. R. (2010). Microeconomic analysis. Mumbai: Viva Books.
Wheelan, C. (2010). Naked economics: undressing the dismal science. New York: W.W. Norton & Company
