Analysing Current Economic Issues

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Recommended: Supply and demand economy

Demand and supply is considered a basic economic concept, as well as a fundamental part of a free market economy. Demand is the amount of the product or service that consumers wish to acquire. Supply is the quantity of a product or service that is available in the market. The relationship between demand and supply has a great influence on the price of products and services. In the market economy, the distributions of resources are determined by the correlation of demand and supply. Nevertheless, the demand and supply theory will thus allocate resources in the most possible efficient way. Demand can be defined as the quantity of goods or services that buyers are willing and able to buy at various prices during a given period of time (Bolotta and Hawkes 453). The law of demand states that the quantity demanded of a product varies inversely with it price, as long as other things do not change (Ceteris Paribus) (Bolotta and Hawkes 457). Therefore, the higher the price of a good, the less of the quantity demanded and vice versa. The demand theory can be best represented in a graph which is a descending slope. At point A, the price is at P1 and the quantity demanded is at Q1. It shows that if the price of a product is too high, there would be less demand for it. Whereas, at point C, the price is at P3 and the quantity demanded is at Q3. When the price is low, there would be a high demand for the product. Thus, market forces will ultimately shift to point B where the price at P2 and quantity demanded at Q2 can meet (equilibrium). The positive side of demand is that it creates jobs as workforce is needed to produce the products in accordance to the quantity demanded. With increase demand, producers will always look into exploring new ways to increasing the quantity of the product. For example, in the market, if there is an increase in demand for mobile phones then there is an incentive for the supplier to increase their production and hence eventually may lead to an increase in price which will only benefit the profit of the supplier. On the other hand, should there be a decrease in demand in the market, the supplier would not be able to sustain their cost of production and therefore inevitably will lead to the supplier exploring new ways of cost reduction.

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