Supply And Demand

explanatory Essay
1824 words
1824 words

Laws of Supply and Demand The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods. When a suppliers' costs changes for a given output, the supply curve shifts in the same direction. For example, assume that someone invents a better way of growing corn so that the cost of corn that can be grown for a given quantity will decrease. Basically producers will be willing to supply more corn at every price and this shifts the supply curve outward, an increase in supply. This increase in supply... ... middle of paper ... ... Also important is the price of complements, or goods that are used together. When the price of gasoline rises, the demand for cars falls. In conclusion, generally speaking the Law of Supply states that when the selling price of an item rises there are more people willing to produce the item. Since a higher price means more profit for the producer and as the price rises more people will be willing to produce the item when they see that there is more money to be earned. Meanwhile the Law of Demand states that when the price of an item goes down, the demand for it will go up. When the price drops people who could not afford the item can now buy it, and people who are not willing to buy it before will now buy it at the lower price as well. Also, if the price of an item drops enough people will buy more of the product and even find alternative uses for the product.

In this essay, the author

  • Explains that supply and demand are fundamental principles in economics and the backbone of a market economy.
  • Explains that when a supplier's costs change, the supply curve shifts in the same direction.
  • Explains the two types of supply shocks: the negative and the positive.
  • Explains the backward bending supply curve of labor, which is observed in non-labor markets such as the market for oil.
  • Explains that demand is one of the most important building blocks of economic analysis. the law of demand states that when the price of a good rises, the amount demanded falls.
  • Explains that econometric studies show that when the price of a good rises, the amount of it demanded decreases. nobel laureate george stigler said if any economist found an exception, he would be "assured of immortality, professionally speaking, and rapid promotion."
  • Explains that economists believe strongly in the law of demand because it is plausible even to non-economists. shoppers buy more strawberries when they are in season and the price is low.
  • Explains that consumers didn't judge the quality of a car wax before purchasing it. they opted for cheap products that were more likely to be inferior.
  • Explains that non-economists have become skeptical of the law of demand. they think of drinking water, or using it in a household, as the only possible uses.
  • Explains how prices affect demand, and how income affects it. the price of substitutes and gasoline also influence demand.
  • Concludes that the law of supply states that when the selling price of an item rises there are more people willing to produce the item.
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