Demand and Supply

ALLAN C. GULINAO

BSED-MATH-1-1

  

    THE INTERACTION OF DEMAND AND SUPPLY

Price is determined by the interaction of supply and demand. Market price is dependent upon both of these fundamental market forces. The successful commodity trading transaction occurs when buyersdemand and sellerssupply
agree on price. When this exchange occurs, the agreed upon
price is called the equilibrium price, or market clearing price.
This can be seen below as supply and demand.

Buyers and sellers are willing to exchange the amount of
commodity Q at the agreed price P. At this point, supply and
demand is in balance. At any price below P, the amount
demanded is greater than the amount of supply. This situation
would create a price in which the producer is unwilling to
supply, creating a commodity shortage. In order to obtain the
commodity consumers would have to pay a higher price, while
producers would demand higher prices in order to bring more
supply to the market. The end result is a rise in prices to the
point P, where supply and demand is once again in balance.
However, if prices rose above P, the market would have a
surplus glut; more supply relative to demand. Producers
would have to reduce prices in order to clear the market of
excess supply. At this point, Consumers would then increase
purchases as a result of the lower prices. Prices will balance
until supply and demand are again in balance at point P above.

Market prices are not always fairly priced to all in the
marketplace. Supply and demand does not always guarantee
buyers and sellers; this depends on their competitive positions
within the market. Market prices play a central role in
competitive landscape of the commodity markets; extremely
low prices result in excess profits for the buyer, attracting
demand. Conversely, excessively high prices attract additional
producer competition, which creates supply. Therefore,
varying price levels exist where buyers and sellers are
satisfied, creating market price.

The law of supply and demand is one of the basic founding principles of economics. The law states that as supply goes up and demand stays the same, the value of the item goes down because there is more of the item than is needed. Therefore, the price of an item goes up if supply is low and demand is high because people are prepared to pay more for something they need.

I think this law is incredibly important for the welfare of all people in business because it prevents large corporations from making too much money unless the consumer body increases. Because, unless the demand increases, the same amount of products has to be made, or, the value of the product decreases and nobody benefits. This is the reason there is always a race for a new consumer body. Once one company has control the other companies cannot take their market.

This law can be applied to all situations where there is an item being purchased. One of the things that changed for the world in the Industrial Revolution was that labor became a commodity. There was a market of workers who would sell their labor to companies and companies would buy their work. An example of supply and demand in a work force is with engineers. There are not many engineers in the world but the demand is huge so engineers are paid very well and have a very powerful position because they can choose where to work. Here’s an example of the law applied to a commodity. We all know that diamonds are very valuable, but they would be worth nothing if there were piles and piles of diamonds in street because the demand for diamonds would be much less than the supply.

The law of supply and demand is what keeps businesses on its toes, and it is also the principle of trade. If the demand of a product in country 1 is much bigger than the supply of the product and country 2 has more supply than demand then country 2 can export the product and get a better price than it would get in country 1.

The law of supply and demand is a fundamental rule in life, and trade would not exist without it. It is a law that we sometimes don’t notice, but when you think, it’s amazing what a huge role it plays in our lives. Our way of thinking is based on it and it is impossible for life to be anything like it is now without it.

The Law of Demand:

The law of demand says that if price of goods is higher, the less people will demand that good, in other words the higher in price, lower the quantity demand. The amount of a good that buyer purchase at higher price is less because the price of good goes up.

As a result people will naturally avoid buying that product; they will prefer to buy an

alternate of that good which reaches their income.

 The Law of Supply:

The law of supply states that if price of good is higher the supply of the good increase, because the producer supply more at higher price, selling a good at higher price will increase their revenue.

LAW OF DEMAND and REASONS

The law of demand can be explained by:
1) Price being an obstacle to consumption
2) Diminishing marginal utility
3) Price change income effect and substitution effect

INCOME EFFECT

The law of demand can be explained by observing that an unexpected price change
affects the purchasing power of consumers. If the price is lower than expected, income is
liberated which allows the consumer to buy more. An unexpected price increase would
cause the consumer to buy less.

LAW OF SUPPLY

The law of supply postulates that the relationship between price and quantity in the

mind of sellers or producers is a direct one. When price increases so does quantity.

LAW OF SUPPLY REASONS

The law of supply is explained by
1) Price being an inducement for sellers or producers to sell more, and
2) Cost of production increasing (because of the law of diminishing returns)

SUPPLY DETERMINANTS

Price is the major determinant of supply. Nonprice determinants are: -
1) Number of sellers or producers
2) Costs of production (including taxes)
3) Technology (since it affects costs)
4) Prices of other goods (as sources of possible profits)
5) Expectations (but the effect is ambiguous).