Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. generally resulting in market equilibrium where products demanded at a price are equaled by products supplied at that price.
Demand depends on the price of the commodity and refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.
Supply depends not only on the price obtainable for the commodity but also on the prices of similar products and represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.
The law of demand and supply:
The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. How? By the following of demand and the law of supply. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.
The four basic laws of supply and demand are:
If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.
The Law of Demand
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The brief meaning is when the price of a product is increased then less will be demanded. Also is the same for the opposite, when the price of a product is decreased then more will be demanded.
The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue. The brief meaning is If demand is held constant, an increase in supply leads to a decreased price, while a decrease in supply leads to an increased price.
Factors affecting demand and supply:
Price: when the price goes up, demand goes down and vice versa.
Changes in consumers’ Income spent on goods and services
Changes in government fiscal policy and monetary policy
Changes in the growth rate of a Population
Natural disasters (storms, hurricanes, earthquakes, tornadoes, floods etc)
Changes in the Tastes/Preferences of consumers for goods/services
Changes in the state of the art of business firms
Nature of the good is basic commodity, it will lead to a higher demand
As more or fewer producers enter the market this has a direct effect on the amount of a product that producers are willing and able to sell
The producer’s expectations
Paragraph of demand and supply( with an example)
The perfect competition:
Perfect competition is a theoretical market structure, Also is market structure where there are large number of buyers and sellers who are willing to buy or sell a product or service at a given price basically used as a benchmark against which other market structures are compared. Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. Economists have become more interested in pure competition partly because of the rapid growth of e-commerce in domestic and international markets as a means of buying and selling goods and services
Basic assumptions required for conditions of pure competition to exist
” Essentially these factors exist to prove that firms in perfect competition have no influence over other competitors or over the demand for its own goods.
Large Number of Small Firms Each firm produces only a small percentage compared to the overall size of the market output. If one firm decides to double its output or stop producing entirely, the market is unaffected. The price does not change and there is no discernible change in the quantity exchanged. The meaning is firms has no control over the market price.
Many individual buyers, none of whom has any control over the market price
Firms have the freedom of entry and exit from the industry.” They are not restricted by government rules and regulations”
Perfect knowledge: In perfect competition, buyers are completely aware of sellers’ prices, such that one firm cannot sell its good at a higher price than other firms. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price. other words, there are few transactions costs involved in searching for the required information about prices
A monopoly exists where there is only one supplier of a product or service. This allows the supplier to charge higher prices than if there was competition
The meaning of monopoly is that there is no competition and therefore the supplier has a very high degree of pricing power
Monopolies can arise in a number of ways including:
By developing or acquiring control over a unique product that is difficult or costly for other companies to copy
By using various legal and/or illegal tactics such as an agreements by former competitors to cooperate on pricing or market share “illegal in most countries”. And/ or taking control of suppliers of inputs required by competitors or conspiring with them to raise their prices (or lower their quality of service, etc.) to competitors