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Supply and Demand



Kirjoittanut: Oshadi Mohottiarachchi - tiimistä Kaaos.

Esseen tyyppi: Akateeminen essee / 3 esseepistettä.
Esseen arvioitu lukuaika on 12 minuuttia.

SUPPLY AND DEMAND

 

 

CONTENTS

1    INTRODUCTION

2    RELATIONSHIP BETWEEN SUPPLY & DEMAND

3    THE LAW OF SUPPLY AND DEMAND

4    SUPPLY AND DEMAND WITH PRICING

5   EFFECTS OF TECHNOLOGY ON SUPPLY & DEMAND CURVE

6   THE MARKET SUPPLY CURVE

7   THE MARKET DEMAND CURVE

8   EFFECTS OF CHANGES IN DEMAND & SUPPLY ON MARKET EQUILIBRIUM

REFERENCES

 

 

INTRODUCTION

 

In this essay it covers what is demand and supply, relationship between these two, the law of supply and demand, and how supply and demand connects with pricing, effect on the new technology on supply and demand, what is supply curve and what is demand curve also the effect of changes in demand and supply on market equilibrium.

Supply, a fundamental concept in economics, refers to the total quantity of a specific good or service that is readily available in the market for consumers. This concept plays a crucial role in determining the price and dynamics of the market, as it interacts with demand to reach an equilibrium point. The availability of a product or service can be influenced by factors such as production capacity, cost of resources, and technology, among others. As the nature of supply changes, it can cause shifts in pricing and the overall economic landscape. (Britannica,2022)

In economics, the concept of demand plays a crucial role in understanding market dynamics and consumer behavior. Demand refers to the quantity of a particular product or service that consumers are willing to purchase at a given price level. It is an essential factor in determining the equilibrium price, which helps businesses and policy makers make informed decisions. Moreover, the law of demand states that, all else being equal, as the price of a product increases, the quantity demanded decreases, and vice versa, thereby underlining the importance of demand in shaping market trends. (Britannica,2022)

 

Relationship between supply and demand

 

Supply and demand are a fundamental concept in economics, governing the interaction between sellers of goods and services and their potential buyers. It operates on the principle that price and quantity of goods or services within a market are determined by the balance of buyers’ willingness and ability to pay with the sellers’ capacity to produce and offer these goods or services. When demand is high and supply is low, prices tend to rise, encouraging more production by suppliers. Conversely, if supply is abundant and demand is limited, prices generally decrease, stimulating consumption and discouraging excessive production. If supply is abundant and demand is limited, prices generally decrease, stimulating consumption and discouraging excessive production. This balance between supply and demand helps regulate the market and fosters economic efficiency. Understanding these relationships enables businesses to better anticipate market shifts and make informed decisions regarding production, pricing, and resource allocation. Conversely, the law of supply states that higher prices encourage an increase in the production and supply of an economic good, while lower prices tend to reduce it. This principle plays a crucial role in balancing the market forces and ensuring the availability of goods in accordance with consumer demands. As a result, producers strategically adjust their supply based on the prevailing market prices, striving to maximize profits. Understanding the intricacies of the law of supply, combined with the law of demand, provides a solid foundation for analyzing and predicting market trends and behaviors. (Britannica,2022)

One of the main key points to consider is that a market-clearing price balances supply and demand and can be graphically represented as the intersection of the supply and demand curves. This equilibrium price ensures that the quantity supplied equals the quantity demanded, thus avoiding any surplus or shortage in the market. As prices fluctuate, both suppliers and consumers react accordingly to maintain this balance, contributing to the overall stability of the market. Recognizing and analyzing this market-clearing price can help investors and business owners make informed decisions regarding market positions and future strategies. (Fernando.J, 2023)

 

 

 

 

The law of supply and demand

 

The law of demand is a fundamental concept in economics, stating that as the price of a product increases, the demand for that product decreases, assuming all other factors remain constant. This principle dictates that consumers are more hesitant to purchase items with higher price tags, often opting for more affordable alternatives. Consequently, businesses and governments must consider the impact of price fluctuations on the consumer behavior and market trends. A strong understanding of the law of demand is crucial for making informed decisions in various sectors, from manufacturing to marketing strategies. (Fernando.J, 2023)

The law of supply is a fundamental economic principle that demonstrates the relationship between the price of a product and the quantity of that product supplied by producers. As the price of a product increases, the quantity supplied generally also increases, reflecting a direct and positive relationship between the two variables. This concept can be easily visualized through a supply curve, which slopes upwards and to the right, illustrating the increase in quantity supplied as the price rises. In contrast, the law of demand showcases an inverse relationship, wherein an increase in price leads to a decrease in the quantity demanded by consumers. (Fernando.J, 2023)

The law of supply and demand is a fundamental economic principle that explains the relationship between the quantity of a product available and the desire of consumers to purchase it. At its core, the law dictates that when there is a high demand for a product, but a limited supply, the market price will typically rise. Conversely, when there is an abundance of a product, but demand is low, the market price tends to decrease. By understanding this simple principle, we can better grasp how market forces work together to balance the availability of goods and services with consumer demand in various industries. (Fernando.J, 2023)

 

 

Supply and demand with pricing

 

 

The law of supply and demand is a fundamental economic principle that asserts a direct relationship between the availability of goods and services and their prices. This concept plays a crucial role in determining the price levels within a market-based economy. In essence, when supply increases and demand remain stable, prices will generally decrease, while a rise in demand and a stable supply will lead to an increase in prices. Ultimately, the law of supply and demand helps to maintain a balance within the market, allowing for a fair distribution of resources and influencing the choices of both producers and consumers. (Kramer. L, 2021)

The supply of various products in the market responds differently to changes in demand, largely influenced by the consumers’ sensitivity to price fluctuations. Price elasticity of demand is a concept used by economists to describe this phenomenon, providing an insight into how the demand for a specific product shift as its price changes. For instance, some products may have a high price elasticity of demand, indicating that even minor price adjustments can lead to significant variations in consumption patterns. Products with highly elastic demand exhibit significant changes in consumption as prices increase or decrease, while those with inelastic demand remain relatively stable despite price shifts. This phenomenon is essential for producers and retailers to make informed decisions about appropriate pricing strategies and the potential effects on their business. (Kramer. L, 2021)

Price controls can also distort the effect of supply and demand on a market. Governments may impose such controls to stabilize prices or ensure the availability of essential goods, potentially interfering with the natural balance between supply and demand. Although these policies can provide short-term economic relief, they may lead to longer-term inefficiencies and unintended consequences as companies adjust production in response to artificially established prices. Understanding the role of price controls in shaping market dynamics is essential for both policymakers and businesses to make informed decisions and effectively manage the impact of these interventions. While we’ve mainly been discussing consumer goods, the law of supply and demand affects more abstract things as well, including a nation’s monetary policy. Central banks, for instance, can manipulate interest rates and implement measures to influence the availability of credit and money supply in the economy. These actions have a direct impact on the financial market, affecting businesses, investors, and consumers alike. By understanding the intricate relationship between supply and demand in the context of monetary policy, stakeholders can better navigate any financial fluctuations that may emerge as a result of these actions. (Kramer. L, 2021)

In the United States, the Federal Reserve plays a crucial role in managing the nation’s financial system by controlling the money supply. When seeking to stimulate the economy, prevent deflation, boost asset prices, and increase employment, the Fed increases the money supply. Conversely, when the goal is to lessen inflationary pressures, the Federal Reserve opts for raising interest rates and reducing the money supply. These strategic decisions allow the central bank to maintain stability and promote growth while ensuring the overall health of the economy. (Kramer. L, 2021)

 

Effects of technology on supply and demand curve  

   

  The development of technology has played a significant role in shaping the dynamics of supply within various industries. As innovative solutions emerge, input costs of production are often reduced, leading to shifts in the supply curve. These advancements not only result in increased efficiency but also enable businesses to scale their operations and enhance their competitiveness in the market. Ultimately, the impact of technology on supply extends far beyond cost reduction, contributing to the overall economic growth and increasing the availability of goods and services for consumers. As a result of these technological advancements, lower prices allow consumers to purchase more of previously expensive items such as TVs and computers, leading to a rightward shift in the supply curve. This phenomenon is evident in the laptop market, where costs have dramatically decreased over the years. Laptops that were priced at several thousand dollars a few years ago are now available for just a few hundred dollars, with increased storage capacity and faster processor speeds. This affordability enables a wider range of consumers to access and benefit from modern technology, simultaneously bolstering the production and supply of these goods. (Woodruff. J, 2019)

Changes in technology have a profound impact on the demand for various products, as well as their related counterparts. The advent of new technology can lead to an increased market for a product by boosting the demand for innovative offerings while simultaneously rendering older, more traditional products obsolete. This phenomenon often results in a shift in consumer preferences and plays a critical role in shaping industry trends. By understanding how technological advancements can influence product demand, businesses can adapt their strategies to capitalize on these market changes and stay ahead of the competition. As a result, the demand for laptops was reduced in the face of competition from tablets. In electronics, advances in technology are constantly changing the landscape with the introduction of new products and forced obsolescence of older products. This rapid evolution continues to shape consumer preferences and market trends, leading to more versatile and convenient devices. Furthermore, manufacturers are compelled to innovate and stay ahead of the competition, ensuring that the industry remains dynamic and ever progressing (Woodruff. J, 2019)

 

The market supply curve

 

The market supply curve is a fundamental concept in economics that demonstrates the relationship between the quantity of a product or service that producers are willing to provide and the price at which they are willing to sell it. One of the primary factors influencing the shape of the supply curve is the cost of inputs. This encompasses not only the raw materials and components required for manufacturing a particular product, but also the wages paid to workers, utility costs, and other variable expenses associated with operating a business. As these input costs change, the market supply curve shifts, reflecting the adjustments producers must make in order to maintain profitability while meeting consumer demand. (Hamel.G, 2019)

Advancements in technology have greatly impacted the way companies operate, making them more efficient in producing and supplying goods. Innovative production methods and automation have contributed to reducing lead times and improving overall product quality. With better systems in place, companies are now able to meet increasing demands while maintaining a competitive edge in the market. Consequently, this has led to a more abundant supply of goods, making them more accessible to consumers worldwide. The number of sellers of a product that exist in the market can significantly impact the supply curve. When there is an increase in the number of sellers offering a product, the market supply curve typically shifts to the right, which can lead to lower prices and increased competition. Conversely, a decrease in the number of sellers can result in a leftward shift of the supply curve, potentially causing higher prices and reduced market competition. Furthermore, the responsiveness of these shifts can be influenced by various factors such as barriers to entry, production costs, and the overall market structure. The cost of goods that fulfill a similar purpose to a given product, known as substitute goods, can significantly impact the supply curve for that product. When the price of a substitute good decreases, it becomes more appealing to consumers, leading them to shift their demand from the original product to the alternative. This change in consumer preferences can cause a leftward shift in the supply curve of the original product, ultimately leading to a decrease in its production. Conversely, an increase in the price of substitute goods can result in higher demand for the original product, creating a rightward shift in the supply curve and boosting production volume. Future expectations play a crucial role in influencing the supply curve for a product. Producers often make decisions based on their anticipation of market trends, consumer preferences, and technological advancements. If suppliers anticipate a growing demand for a product, they may increase production levels to meet the expected demand, shifting the supply curve to the right. On the other hand, if they expect a decline in demand, they might reduce production levels, causing the supply curve to shift to the left. (Hamel.G, 2019)

 

The market demand curve

   

  The factors that affect movement along the demand curve and those that cause a shift in the curve are distinct and different. It is essential to understand that changes in price result in movement along the curve, representing a change in quantity demanded. On the other hand, factors such as changes in consumer preferences, income levels, and the prices of substitute or complementary goods can cause the entire demand curve to shift. By analyzing these disparate factors, one can better comprehend the dynamics of supply and demand in a market economy. (Woodruff.J, 2019)

    The price of related goods plays a crucial role in shifting the demand curve. An increase in demand for one product may directly impact the demand in a related good, such as the case with substitute goods or complementary goods. For example, a rise in the price of coffee may lead consumers to buy more tea, which would shift the demand curve for tea to the right. Understanding these relationships between related goods allows us to predict how changes in one market can have ripple effects across other markets. As consumer incomes rise, so does the demand for various products and services. This increased purchasing power often leads to a higher frequency of outings to expensive restaurants, as people feel more financially secure in indulging in fine dining experiences. Consequently, the success of such establishments becomes closely tied to the economic well-being of their patrons. By analyzing the fluctuations in consumer income, we can better understand the relationship between income levels and the demand for luxury experiences like upscale dining. As the composition of the population shifts, the demand for various products is impacted as well. Demographic factors, such as age, income, and geographic location, play a significant role in shaping consumer preferences and purchasing behavior. For instance, an aging population may result in increased demand for healthcare products, while an expanding urban population may create demand for technology and transportation services. Therefore, understanding the dynamics of population change can be vital for businesses to predict and adapt to evolving market trends. In addition to demographic factors, the ever-changing tastes of consumers play a crucial role in market demand. Swings in popular preferences and emerging trends can strongly influence the appeal of various products and services. For instance, a surge in environmental awareness might lead to the increased demand for eco-friendly products and sustainable alternatives. By staying attuned to consumers’ shifting tastes, businesses can capitalize on new opportunities and effectively navigate the competitive landscape. Consumers’ expectations about the future play a significant role in shaping their buying habits. When people anticipate economic growth and financial stability, they are more likely to make substantial purchases and invest in new products or services. Conversely, if consumers foresee economic uncertainty or a downturn in the market, they may reduce their spending and focus on saving for potential hardships ahead. Thus, understanding these expectations is crucial for businesses to adapt their strategies and maintain a steady customer base. (Woodruff.J, 2019)

 

 

Effects of changes in demand and supply on market equilibrium

 

    Equilibrium is a fundamental concept in economics that refers to the point where the supply and demand curves intersect on a graph (the picture above shows). This intersection represents a state of balance, in which the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers. By reaching equilibrium, scarce resources are efficiently allocated, and market forces are in harmony. Understanding the mechanics of equilibrium helps inform decision-making in a range of economic contexts, from setting prices to anticipating market trends. A rightward shift in the demand curve signifies an increase in demand, typically resulting from factors such as population growth, consumer preferences, or increased disposable income. Conversely, a leftward shift reflects a decrease in demand, which can be attributed to economic downturns or changes in consumer behavior. In scenarios where demand increases, it is usually a result of supply and price being relatively low, prompting more consumers to take advantage of accessible goods or services. Analyzing these shifts in demand is crucial for businesses and policymakers alike, as it enables them to make informed decisions and adapt to ever-changing market conditions. (Ackermann. N, 2022)

In today’s ever-changing market dynamics, it is essential to understand the impact of shifts in demand on equilibrium price and quantity. When demand increases, as reflected by a rightward shift in the demand curve, there is a direct effect on both the equilibrium price and quantity. Consequently, a higher equilibrium price emerges due to the increased competition among buyers, and the equilibrium quantity also rises as suppliers are willing to produce more to meet this growing demand. Thus, understanding these fundamental concepts is crucial for businesses and policy makers to make informed decisions and anticipate market responses. (Ackermann. N, 2022)

 

REFERENCES

 

Ackermann,N. ‘’Supply and demand changes’’. 25 March 2022. https://study.com/academy/lesson/how-changes-in-supply-and-demand-affect-market-equilibrium.html. Read on 07.03.2023.

 

Britannica, The Editors of Encyclopaedia. “Supply and demand”. Encyclopedia Britannica, 16 Aug. 2022. https://www.britannica.com/topic/supply-and-demand.  Read on 7.03.2023.

Ferernando,J . ‘’Law of supply and demand in economics: how it works’’. 13 marches. 2023. https://www.investopedia.com/terms/l/law-of-supply-demand.asp. Read on 15.03.2023.

 

Hamel,G. ‘’what is market supply curve determined by?’’. 2019. https://smallbusiness.chron.com/effects-technology-supply-demand-curves-30626.html. Read on 7.03.2023.

 

Kramer, L. ‘’How does the law of supply and demand affect prices?’’. 29 april.2021.https://www.investopedia.com/terms/l/law-of-supply-demand.asp. Read on 7.03.2023.

 

Woodruff, J. ‘’effect on technology on supply and demand curve’’. 20 March 2019. https://smallbusiness.chron.com/effects-technology-supply-demand-curves-30626.html. Read on 07.03.2023.

 

Woodruff, J. ‘’price determination in economics’’. 10 December 2018. https://smallbusiness.chron.com/effects-technology-supply-demand-curves-30626.html. Read on 08.03.2023.

 

Woodruff, J. ‘’shifting the demand curve vs. moving along the demand curve. 06 March 2019. https://smallbusiness.chron.com/effects-technology-supply-demand-curves-30626.html . Read on 08.03.2023.

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