Supply & Demand Concepts

Concept of Demand and Supply

Supply and Demand Concepts

Supply and demand is an economic model based on price, utility, and quantity in a market. It concludes that in a competitive market, a price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity. An increase in the quantity produced or supplied will typically result in a reduction in price and vice-versa. Similarly, an increase in the number of workers tends to result in lower wages and vice-versa. The model incorporates other factors changing equilibrium as a shift of demand and/or supply.
The demand schedule, depicted graphically as the demand curve, 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 downward-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 (number of people), the government policies, the price of substitute goods, and the price of complementary goods. The shape of the aggregate demand curve can be convex or concave, possibly depending on income distribution. In fact, an aggregate demand function cannot be derived except under restrictive and unrealistic assumptions.
As described above, the demand curve is generally downward sloping. There may be rare examples of goods that have upward-sloping demand curves. Two different hypothetical types of goods with upward-sloping demand curves are a Giffen good (an inferior, but the staple, good) and a Veblen good (a good made more fashionable by a higher price).

Demand Concepts

Figure 1.3: Demand Curve

In a market economy, individual consumers make plans of consumption and individual firms make plans of production based on the changes in market prices. Economists use the term invisible hand to describe the frequent exchanges in the market because everyone (no matter consumer or producer) takes the market price as a signal on trade and makes exchanges with private property rights (defined and protected by laws). The price system works in a market economy only if there is the free choice within the market. The following sections explain how the market price is determined by the interaction of consumers (demand) and producers (supply). In the latter parts, the factors causing a change in price are explained.
Demand Concepts : In economics, the word  Demand Concepts consists of 4 main concepts
It refers to both the ability to pay and a willingness to buy by the consumer (s). Demand is sometimes called effective demand.
Demand can be shown by a demanding schedule which shows the maximum quantity demanded (willing & able to buy) at all prices.
Demand is a flow concept. Our willingness and ability to buy is subjected to a time period. At different times, we may have different demand schedules.
There are many factors affecting our demand. In order to explore the effect of price on quantity demanded, economists like to assume other factors unchanged so as to make the analysis easier.
In Latin, the term ceteris paribus‘ means holding other factors constant or unchanged‘. An individual demand refers to the quantity of a good a consumer is willing to buy and able to buy at all prices within a period of time, ceteris paribus.
The concept of Supply:  The word supply bears 4 similar with Demand Concepts:
It refers to both the ability to sell (produce) and the willingness to sell by the producer(s). Supply implies an effective supply.
Supply can be shown by a supply schedule which shows the maximum quantity supplied at all different prices.
Supply is also a flow concept. Time is an important factor affecting the condition of supply.
There are again many factors affecting the supply of a firm. Economics hold the ceteris paribus condition in order to analyze the relationship between price and quantity supplied by a firm or producer.


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