Why Demand and Supply are Important?
The concept of demand and supply is important for various factors. One of them is studying and evaluating the condition of an economy within a certain period. The analysis or evaluation of the demand-side factors is important for the suppliers to understand the consumer or individual behaviour. The evaluation of supply-side factors is important for the consumer or individuals to understand that what kind of combination of an economic good or what kind of economic good and services he or she should consume to maximise his utility and minimise the cost. Therefore, in microeconomics, both of these concepts are extremely important to have an idea that what exactly is going on in the economy.
What is the Concept and Meaning of Demand?
Demand for a good or a commodity means the amount of the commodity which the consumer or individual is willing to purchase and can purchase during a certain period at the prevailing market price or the certain price. In other words, we can say that demand is the phenomena in which there is the willingness of the consumer or individuals to purchase a commodity and also is having the purchasing power to buy that. Therefore, two factors or two condition needs to be satisfied to have a successful demand, firstly the willingness of the consumer or individuals to purchase it and the purchasing power.
Various Factors Determine the Demand for a Commodity
- Price of the commodity: One of the most important factors that determine the demand for a commodity is the price of the commodity itself. Usually, there is an indirect relationship between the price of the commodity and its amount demanded. This implies that the lower the price of a commodity, the more will be the amount demanded of the commodity. Similarly, we can say that the higher the price of the commodity, the lower will be the amount demanded.
- Salary of the consumer or individual: This is one of the basic determinants of the demand for a commodity instead what kind of purchasing power is the consumer or individual having or what salary does the consumer or individual do to purchase some particular kind of commodity. The relationship between the salary of the consumer or individual and the demand of the commodity varies between different types of economic goods. Normally there are three kinds of goods based on which the relationship between the salary and the demand for the commodity differs.
- Normal economic good: Normal economic good is that variety of economic good for which the demand rises as the salary of the consumer or individual rises and decreases with a fall in salary. In this case, we can say that normal economic good has a direct relationship or establishes a direct relationship in terms of the salary of the consumer or individual and the demand for the commodity.
- Inferior economic good: Inferior economic good are those kinds of economic good for which the demand falls with a rise in salary and vice versa. Therefore, we can say that there is an indirect relationship between the salary of the consumer or individual and the demand for the inferior economic good.
- Inexpensive economic good or necessary economic good: In case of necessary economic good such as salt or matchbox, the amount rises with increasing salary but up to a certain level and after that it remains more or less constant no matter how the level of the salary of the individual fluctuates from time to time.
- Taste and preference of the consumer or individual: The demand level of the consumer or individual is influenced that what kind of taste and preference does the consumer or individual or individual have food store it depends mainly on the social customs, habits of the people, fashion, and the general lifestyle that the people lead.
What is a Law of Demand?
The law of demand states that other things remaining constant, the amount demanded a commodity rises when its price falls and decreases when its price rises.
Assumptions of the law of demand
- There should be no change in the tastes and preferences of the consumer or individual or individual.
- The size of the population should not change.
- There should be no change in the salary of the consumer or individual.
- The price of the related commodities that is the price of substitute economic good and complimentary economic good should remain self-same.
- The distribution of the salary among the population should remain the same.
- The commodity should always be on normal good.
It is the pictorial representation of the law of demand. In other words, we can say the picturization of the demand schedule is called the demand curve. It is the curve that shows different quantities of commodities demanded at various alternative prices during a given period. The demand curve is usually a downward sloping curve that shows the negative relationship between the price of the commodity and the amount demanded of that commodity.
There are certain exceptions to the law of demand
- Expectation regarding the future prices: This is one of the exceptions to the law of demand which states that if the consumer or individual or individual order individual speculates that the price will be higher shortly, no matter how high the price is at the current moment he or she will demand more of that commodity to avoid the hike in the future.
- Quality-price relationship: It is sometimes expected that the higher the price of the commodity, the better the quality will be of it. Therefore, at times consumer or individual or individual often purchases higher-priced economic good to get a better quality of the commodity. This is the case when the law of demand does not operate.
- Changing fashion: If a commodity goes out of fashion after a specific period, no matter how less will be the price of that commodity, the people of that economy will not purchase that commodity anymore because it is out of fashion at the current moment.
Change in demand- shifting the demand curve
When the amount of commodity purchased rises or falls because of the change in factors that determine the demand of a commodity rather than the price of the commodity, this phenomenon is recognized as a change in demand. Change in demand can be of two types one is the increase in demand and the other is the decrease in demand.
- Increase in demand: Increasing demand refers to a situation when the consumer or individual buys more amount of a commodity even at a certain price because of the change in the factors determining the demand of that commodity but not the price of the commodity. This can happen due to various reason, due to rise in salary, due to change in taste and preferences, the rising price of substitute economic good, and so on. In this case, the demand curve transposes to the right to show an increase in demand.
- Decrease in demand: This situation takes place when the consumer or individual buys a smaller amount of commodity at the self-same price. This situation takes place as a result of alterations in factors of the determinant of demand but not the change in one’s price of the commodity. In this case, the demand curve transposes to the left because the demand or amount demanded decreases. In other words, we can also say that the demand curve transposes inward.
Movement along the demand curve
When the amount demanded of a commodity alteration due to a result of a change in the price of the commodity and all the other determinants remain constant, this situation is recognized as changing the amount demanded. In this case, the demand curve moves either upward or downward to show an expansion of demand or contraction of demand.
- Expansion of demand: When the amount demanded of a commodity rises due to falling in the price of the commodity, other things remaining constant, it is recognized as extension or expansion of demand. In this case, the demand curve moves upward to show an increase in demand or an increasing amount demanded of the commodity.
- Contraction of demand: This is the situation when the amount demanded falls due to a rise in the price of the commodity and other things remaining constant. The contraction of demand is denoted by a downward movement of the demand curve to shoot a rise in demand or decrease in the amount demanded of the commodity.
What is the Concept of Supply?
Supply of a commodity means or refers to the amount of a commodity that suppliers or producers or sellers are willing to produce and offer to sell at a particular price prevailing in the market during a particular period.
Following are some of the factors that determine the supply of a commodity:
- Price of the commodity: One of the most important factors that determine the supplier for a commodity is the price of the commodity itself. All other things containing constant, more amount of a commodity which will be supplied at a higher price and smaller will be the amount supplied if the price of the commodity is lower. This is because a higher price will lead to a higher profit for the supplier and vice versa.
- Prices of raw materials: Another important factor that influences the level of supply of a commodity is I surprises of the raw materials that are being used in the production process or the prices of the factors of production. It is very natural that if the producers have to pay higher prices to secure the factors of production or the raw materials, the cost of production or production cost will be higher and ultimately the price of the commodity in which it will be sold in the market will also be higher. Because the goal of the supplier or the producer is always to maximize the profit.
- Techniques of production: The technique of production used in a production process is having an extremely important influence on the supply of the commodity. If the technique used in the production process is improved then it Rises the profit margin and lowers the cost of production or production cost.
Law of Supply
The law of supply states that other things remaining constant, the amount of any commodity that the suppliers will produce and offer for sale in the market rises with a rise in its price and falls with a fall in its price. This means that in the case of supply, the relationship between the supply of a commodity and the price of a commodity is positive or we can say that they are directly related.
A supply curve refers to the pictorial presentation or diagrammatic representation of the law of supply. A supply curve is always starting from the origin and is positively related because it obeys the law of demand which states that the price of the commodity and the quantitative applied by the suppliers of that commodity are positively related. It is an upward-sloping supply curve.
Movement along the supply curve
When the amount supplied of a commodity by the supplier alterations as a result of a change in the price of the commodity itself and also the other factors which determine the supply of commodities remains the self-same, this situation is recognized as a change in supply. Change in supply takes place in two different ways one is the extension of supply and the additional attraction contraction of supply.
- Extension of supply: This is the situation when the amount supplied of a commodity by the supplier rise is due to a rise in the price of the commodity itself and other determinants of supply remain constant. It is indicated by an upward movement of the supply curve.
- Contraction of supply: It read it reports to the situation when the amount supplied of a commodity decrease due to a decrease in the price of the commodity and other determinants of the supply usually remains constant. The contraction of supply is indicated by a downward movement of the supply curve.
The shift of the supply curve or changing supply
When the amount supplied of a commodity by the supplier rises or decreases change in the factors determining the supply of a commodity, and not in a change in the one’s price of the commodity, it is recognized as a shift in the supply curve or changing supply curve.
- Increasing supply: It is the situation when the producers or the suppliers are willing to supply amount of the commodity at the same price or the same amount at the low price to stop this situation usually arises when the supplier or the producer uses an improved technology or does this of the raw materials or the inputs that are being used in the production process. The rise in supply is usually denoted by an outward transpose of the supply curve or a rightward transpose of the supply curve from the initial supply curve.
- Decrease in supply: This situation on the other hand refers to the phenomena when the producer or the supplier are willing to supply a smaller amount of the commodity, he at the self-same price or the self-same amount at the higher price. The situation of decreasing supply is usually denoted by an inward transpose of the supply curve or a leftward transpose of the supply curve from the initial supply curve.
Under perfect competition, the equilibrium price and the equilibrium amount at which a commodity should be sold and bought are determined by the demand and supply factors of an economy. An equilibrium price and an equilibrium amount are attained when the demand curve and the supply curve cut or cross each other. The graph that is drawn under perfect competition to determine the equilibrium price and the stable amount of a commodity that needs to be sold and bought is derived from the demand curve and the supply curve of the economy.
Context and Applications
This topic is significant in the professional exams for both undergraduate and graduate courses, especially for
- B.A. Economics
- M.A. Economics
Want more help with your economics homework?
*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Demand and Supply Homework Questions from Fellow Students
Browse our recently answered Demand and Supply homework questions.