Supply and Demand

One of the most important concepts of economics is supply and demand, which is the chief support of a market economy. The relationship between these two factors assists in outline the allocation of resources in the most effective way possible. The demand of a product or service represents the quantity desired by buyers. In other words, demand is the quantity of a product or service that people are keen to purchase at a certain price. The law of demand affirm that, if all other factors don’t alter, the higher the price of a product, the less buyers will demand it. This happens because, as price increases, so does the opportunity cost of buying that product. Consequently, people would avoid buying a good that would force them to forgo something else they value more. However, there are other factors beyond price that determine the demand in a market, such as consumer income, tastes and fashions, the price of alternative and/or complementary goods, sociocultural factors, among others. The relationship between price and quantity demanded is known as the demand relationship, which is shown in the diagram, where the demand curve is a downward slope. As we can see, there are two examples of price and demand. The first example shows that, at price P1 (smaller price), the quantity demanded would be equivalent to Q1 (bigger quantity), while at price P2 (bigger price), the quantity demanded would be Q2 (smaller quantity). On the other hand, supply refers to the capacity of the market to offer the product or service at a given price. It means that, the higher the price, the higher the quantity supplied, as producers aim to supply more at higher prices in order to increase revenues and expand production. In the supply diagram, the slope goes up... ... middle of paper ... ...ess supply, leading some producers to keep their goods, as they won’t be able to sell them. Consequently, producers tend to reduce their prices in order to make their product more appealing as well as remain competitive in the market. In response to lower prices, the demand will increase, moving the market toward of an equilibrium. As opposed to surplus, there is a shortage, which refers to the excess of demand. The shortage makes consumers unable to buy as much of a good as they would like. Therefore, producers will raise both the price of their product as well as the quantity they are keen to supply. Consequently, the increase in the price might be really significant for some people and they will no longer demand the product. On the other hand, the increased quantity of available product might satisfy other consumers, where eventually equilibrium will be reached.