What Are Supply and Demand Curves?
Supply and demand are the basic and most essential concepts of economics. They provide the energy of a market in an economy. Demand is a word used to describe the number of goods or services needed by buyers in the market. It references to the quantity of a good or service individual consumers are willing and able to pay for at a certain price. The relationship between quantity and price is known as the demand relationship. Supply, however, refers to the total amount of goods a market is willing to offer to its consumers (Gale, 2005).
The amount supplied in a given market references the total amount that a particular producer of a good is willing to provide at a specific price (Gale, 2005). The supply relationship refers to the correlation between price and amount supplied in the market. From this explanation, it is very clear that the price provides a reflection of these two items in the market. The relationship between supply and demand lies on the body of resource allocation.
In any market economy, supply and demand theories attempt to allocate resources in the best and most productive and effective way. As I proceed through this paper, you’ll come to understand that there is some similarity in the elasticity of both supply and demand.
The law of demand states that the higher the price of a good, the lower the demand will be for that product, provided all the factors are equal and constant (Hildenbrand, 2013). The buyers will not be willing to buy goods at high prices (Hildenbrand, 2013).
The total quantity of goods that consumers buy at higher prices will be lower because when the price of a product increases, so will the opportunity cost. People avoid purchasing goods that force them to give up consuming another product they value more. Demand curves demonstrate the negative relationship that exists between the quantity demanded and price. The higher the price of a product or service, the lower the demand. The demand will be high when the price is low.
The law of demand ties into the law of supply and explains the quantity of a product that will be sold at a particular price (Chatnani, 2010). This indicates that the higher the prices, the higher the number of goods and service providers will be ready to supply (Chatnani, 2010). Producers are prepared to increase the supply of their product at higher prices because selling higher amounts at raised prices increases their income. For any market to function well, producers must supply their goods and services that are required by consumers. This is the law of supply and demand. Supply references to the total quantity of goods a market can produce while demand references the total quantity of products consumers are ready to purchase.
The combination of these two market forces forms the distinctive and leading principle that underlies economic theory (Chatnani, 2010). Nevertheless, the law of demand illustrates that the higher the prices, the lower the number of consumers will be able to buy the goods. For that reason, demand will go unmet. In order to meet the level of demand, producers should charge a fair price that will result in the sale of the required amount while causing considerable profit. Producers shouldn’t take advantage of the high level of demand to capitalize on buyers by charging high prices on their products.
An example would be a cell phone manufacturing company that observes a huge demand for brand new cell phones in the market. As a result of this demand, the company has an incentive to invest in research in order to produce that phone (Mankiw, 2009). The company will then produce 6000 units and put them in the market for $400 each. Some consumers find it cheap and affordable, so they pay the full $400 and practically half of the stock will be sold. The company will eventually start to lose money because of the unsold stock. The company will then be forced to reduce the price of the cell phone to $300 with the hope of increasing its sales. Because of this reduction, consumers will start purchasing the phone. Nevertheless, some consumers will still not be so excited to pay that price. In order to appease more consumers, the company will be forced to reduce the price of the phone even more in order to increase sales.
This process continues until both the producer and consumer agree on a certain fair price. This price will meet the demand of the consumer as well as maximize the company’s profit (Mankiw, 2009).