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Demand and supply are some of the most fundamental concepts in the field of economics. The two concepts also act as the backbone of any economy. When referring to the demand of a product or service, we are generally talking about how much in quantity of the product or service buyers' desire. Therefore, the quantity demanded is the amount of the product that people are willing and able to buy at a specific price. This results in the relationship between quantity demanded and the price, referred to as the "demand relationship" (Mankiw, 1998). The other fundamental aspect of economics supply refers to the amount of product or service that the market can offer. The amount of product supplied refers to the amount of a product producers are willing and able to supply at a certain price. Therefore, the relationship between the amount supplied and the price is the "supply relationship" (Mankiw, 1998).
An array of factors influences demand. According to the "Law of Demand", when the price of a product or service is high, fewer people will be willing or able to buy it and so its demand will be less. This implies that the "higher the price, the lower the quantity demanded" (Arnold, 2007). The idea behind the law of demand is that it tries to explain the situation whereby an increase in the price of a commodity or service will directly result in an increase of the "opportunity cost" of purchasing the same good or service. This will lead to people avoiding buying a product, which will make them sacrifice another product they deem of prime importance. Some of the factors affecting supply include the price of the good or service. If the consumer is earning little money then the opportunity cost for buying a certain good is high. Some people will have different tastes for different products, which affects the demand. The price of complimentary or substitutes will also affect demand, for example the price of sugar will affect the demand for tea (Arnold, 2007).
In the diagram above, A, B and C represent different points in the curve with each point representing a relationship between quantity demanded and quantity supplied. At point A, the quantity demanded is Q1 while the price is P2 and so on for the other points. The curve proves that the higher the price the lower the quantity demanded.
In the other fundamental pillar of economics, supply it is also affected by a variety of factors with price being one of them. In contrast to demand, the supply of product or service will increase as the price increases. The "Law of Supply" states that the higher the price, the higher the supply, which implies that the supply curve, will be upward in contrast to the demand curve that slopes downward. Supply is affected by the price of the commodity. Changes in technology will also affect the supply of good, especially considering that technology enhances production and thus increases supply. Government involvement such as subsidies will also affect the goods supplied in the market.
In the diagram above, A,B and C represents various points in the supply curve, with each point representing a different price P and the amount of quantity Q supplied.
The supply relationship, unlike demand is a factor of time. Time is of paramount importance for suppliers, especially considering the fact that suppliers must but not always possible for them to react quickly to changes in demand or the price. This means that the supply will be by whether a price change resulting in demand fluctuations is either permanent or temporary. A good example to prove this point would be a sudden increase in demand of warm clothes in the cold season. This will lead to an increase in price. Suppliers on the other hand may try to satisfy the increased demand by producing more umbrellas. However, the climate may fluctuate and the suppliers will suffer heavy losses, as the population may not need the warm clothes anymore. However, should the weather persist and last for a long time, then the suppliers will be required to adjust their production to meet the long term demands.
Relationship between demand and supply
If for example a type of clothing comes to the market for about 20$, and the company producing this type of cloths produces 100 clothes, which a limited number because previous results showed that the demand was low because the high opportunity cost. However, when the 100 clothes produced attract 200 people, the price will subsequently increase based on the law of demand, which states that price will increase with demand. As the price increases and there is more demand for the product, the law of supply comes into play which states that a higher price will result in an increase in supply. However, in the opposite scenario by producing 200 hundred clothes and the demand remains at 100, the price will not increase and is likely to go even down because supply is more than the clothes demanded.
In both the supply and demand relationship curves, it is evident that there is a point where the amount supplied is equal to the amount demanded at a particular price. This is the equilibrium. This is point whereby there is high efficiency because the goods supplied are all consumed, which leads to the satisfaction of everybody in the chain.
The figure above shows the equilibrium point, where there is an intersection of demand and supply curve. This results in equilibrium price E.P and Equilibrium quantity E.P.
In contrast to equilibrium, situations exist where there is excess demand or excess supply. Excess demand may result in setting the price below the equilibrium price. This means that many people will want to have the good but the suppliers are not producing enough of it due to the low price. Excess supply will result if the price is too high and producers produce much of the products aiming for greater returns. Shifts in either demand or supply may be to the changes in quantity demanded or supplied, even though the price may remain unchanged. For example when the price of soda was 1$, then its demand increased, then only the demand of the soda will shift. This implies that the demand relationship changes but is affected by another factor other than price, for example when there is hot weather and people prefer taking sodas. Another instance would be the reduction in supply of sodas but the price remains the same.
In conclusion, it is evident that supply and demand plays a fundamental role in economics. However, what comes out clearly is the need to attain equilibrium to leave all players in the market satisfied. However, this is only theoretically possible and so markets should try to lessen the gaps in trying to attain equilibrium.