The law of supply and demand describes how prices will vary based on the balance between the supply of a product and the demand for that product (Wikipedia, 2005). If there is a balance between the supply, (the availability of the product), and the demand, (how much product the consumers want), then the price for the product would be considered good. If there is an imbalance, the price will change. According to Adam Smith, the invisible hand is a self-adjusting force in the market that corrects the price of a product through supply and demand (Colander, 2006).
When a product is in short supply and there is significant demand for the product, the price will increase (Colander, 2006). When the quantity of the product is greater than the demand, the price will decrease (Colander, 2006).
This assumes there exist a competitive marketplace. This process of price variability based on the supply of a good and the demand for it will continue until a balance is once again reached (Wikipedia, 2005). At that point, equilibrium is said to be established between the supply and the demand.
Kirzner (2000) commented: "The theory of supply and demand is recognized almost universally as the first step toward understanding how market prices are determined." Furthermore, this theory also explains how the price of a product shapes production and consumption decisions (Kirzner, 2000).
Scarcity means there is less of something than is demanded or wanted (Investopedia Inc., 2005). For a nation, for example, scarcity may refer to natural resources, technology, labor, etc. Resources are always limited in one way or another, therefore, individuals, companies, and nations must make decisions related to what the scarce resources are.
Choice may involve a trade-off, for example, a worker needs more money, which he or she can obtain by working longer hours. The trade-off would be less leisure time, less family time. This is viewed as the opportunity cost in making the choice. It is the benefit forgone of the next best alternative to the activity you've chosen. In economic reasoning, that cost is less than the benefit of what you've chosen (Colander, 2006).
The law of supply and demand and the concepts of scarcity and choice are interdependent of each other. If supply and demand are in balance, there is no scarcity, and the only decision a consumer makes is whether or not they want the product and they have the means to pay for it.
In this essay, the author
- Explains that the law of supply and demand describes how prices will vary based on the balance between the supply of a product and the demand for that product.
- Explains that when a product is in short supply and there is significant demand for the product, the price will increase.
- Explains the process of price variability based on the supply of a good and the demand for it will continue until equilibrium is established between supply and demand.
- Explains that kirzner's theory of supply and demand is recognized almost universally as the first step toward understanding how market prices are determined.
- Explains that scarcity means there is less of something than is demanded or wanted. for a nation, it may refer to natural resources, technology, labor, etc.
- Explains that choice involves a trade-off, which is viewed as the opportunity cost in making the choice. it is the benefit forgone of the next best alternative to the activity.
- Explains the law of supply and demand and the concepts of scarcity and choice are interdependent of each other.
- Analyzes how consumers are accustomed to living a certain lifestyle and expect the quality of life they are used to. they absorb the significant increase in price, demanding at least as much fuel as ever.
- Describes the supply demand scenario unfolding in sheridan, where wal-mart has opened a super-center that sells retail products, groceries, and auto fuel.
- Explains that the increase in the supply has made more product available and thus lowered the cost for the consumer. the increased competition is beneficial for consumers.
- Explains the interrelationship between supply, demand, scarcity and choice is the first step in understanding the founding, rudimentary economic principles that govern our lives.
- Describes the bibliography of colander, david c., and kirzner, israel a.
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