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).
Figure 1.3: Demand Curve