Supply and Demand
The Youtube video below is a quick overview of what is Supply and Demand in economics.
Text of the video:
If you've only heard of one economics concept, it's probably supply and demand. Eventually we'll want to derive this concept from basic assumptions about utility and cost functions, but for now I'll just go through the 2-minute version.
Let's start with supply. A supply curve is a relationship between the price of a certain good, and the amount of that good producers make. Let's say they're producing umbrellas. Supply curves typically slope upwards, since a higher price means producers can earn more from each item they sell, so it's worth it for them to produce more of that item.
Now, on to demand. A demand curve is a relationship between the price of a certain good, and the amount of that good buyers want to buy. Although there are exceptions, most demand curves slope downwards. Intuitively, you'll buy more of something if it's cheaper.
If we graph our supply curve and our demand curve together, we get this cool little X. The price at which supply and demand cross is the market-clearing price.
If the price is at the market-clearing level, producers produce exactly as many umbrellas as as buyers want to buy, so every umbrella is sold, and everyone who wants to buy an umbrella can do so.
What if the price of umbrellas is higher than the market-clearing price? Then producers make more umbrellas than buyers are willing to buy at that price, and we have a surplus. Similarly, if the price of umbrellas is set below the market-clearing price, buyers want to buy lots of umbrellas, but producers aren't so eager to produce that many, so there is a shortage of umbrellas.
It's important to realize that the words "surplus" and "shortage" always refer to price-phenomena. 1000 umbrellas could constitute a surplus if the price of an umbrella is $100, or it could constitute a shortage if the price of an umbrella is $1.
Where would we expect to see prices in our supply and demand model? The answer depends on many things. It depends on whether there is one producer or many, on whether there is one buyer or many, on what the laws are, and on how quickly the market can react to a sudden rain storm.
Supply and demand are one of the most primary concepts in business. Before we go further more about their connection, we must understand the definitions of these two key terms. Demand refers to the quantity of a product or service that the consumers want. The quantity demanded by the consumers is the amount of product that they are willing to pay for it with certain prices. On the other hand, supply represents the quantity of product that the company can offer to the consumers. The quantity is the amount of product that the company is willing to supply to their customers when receiving a certain price.
From both definitions of supply and demand, we can see that these two terms are linked with the price of product. Therefore, price is often said to be the ‘reflection’ of supply and demand. The relationship between these two terms and the selling price can be clearly observed through graphs. The YouTube Video above has explained briefly about graph, and now let us have a closer look and deeper understand on how it actually works like that.
From both definitions of supply and demand, we can see that these two terms are linked with the price of product. Therefore, price is often said to be the ‘reflection’ of supply and demand. The relationship between these two terms and the selling price can be clearly observed through graphs. The YouTube Video above has explained briefly about graph, and now let us have a closer look and deeper understand on how it actually works like that.
Relationship between Supply, Demand and Price
Law of Demand
“The lower the price of a product, the more of that product people will buy (the more demand it has from people).”
“The lower the price of a product, the more of that product people will buy (the more demand it has from people).”
From the graph above, we can see that as the quantity increases, the price goes up. The quantity of a product that consumers buy at a higher price is less. This is because when the price increases, the opportunity cost of buying that product goes up too. People will then avoid buying product that will force them to forgo the consumption of something else they value more.
To make it easier to understand about the law of demand, just think logically and remember: More sales may be encourages if the price of a product reduces, and increasing the price of product can cause lower amount of sales. And one last important thing about it is that the curve of the graph in law of demand is a downward slope.
To make it easier to understand about the law of demand, just think logically and remember: More sales may be encourages if the price of a product reduces, and increasing the price of product can cause lower amount of sales. And one last important thing about it is that the curve of the graph in law of demand is a downward slope.
Law of Supply
“The higher the price of a product, the higher amount of product a company will produce to sell (the higher amount of supply).”
“The higher the price of a product, the higher amount of product a company will produce to sell (the higher amount of supply).”
According to the graph above, we can see that the price increases with the quantity of a product. A business produces goods or services to earn profit. So, if the price of a product is higher, the business may get more profit. To understand this law in an easier way, just imagine that you are a supplier and what can you do to earn more money from your business. And always keep in mind, the curve of the graph in law of demand is an upward slope.
How Supply, Demand and Price Relate to Each Other?
Other example:
Imagine that you are an owner of a business of producing and selling bottles. According to your survey and investigation, you data analysis has shown that people would buy your bottles if the price are lower than $10. Therefore, you set the price of your bottles at $10, and the quantity of the product you have ordered to produce is 100 bottles. However, there are 200 people demanded for the bottles, which means your quantity of product is lower than the demand from people. In this case, according to the law of demand, as the demands goes up so does the price. At the same time, the rise of price encourages more bottles to be produced and supplied, according to the law of demand.
But what if the demands remain 200 people even though you have produced 300 bottles? The price will not increase because the supply is more than the demand. After the 200 people bought the bottles from you, the price for the 100 bottles left will be decreased, because at this circumstance your goal is just to sell out the remaining 100 bottles. You cannot aim to get more profit from them because your 200 customers already had the bottles, which mean your demand has reached the point where it starts to close up. Lower price of the remaining bottles will then attract the people who previously think that the price of $10 per bottles is too high for them.
Imagine that you are an owner of a business of producing and selling bottles. According to your survey and investigation, you data analysis has shown that people would buy your bottles if the price are lower than $10. Therefore, you set the price of your bottles at $10, and the quantity of the product you have ordered to produce is 100 bottles. However, there are 200 people demanded for the bottles, which means your quantity of product is lower than the demand from people. In this case, according to the law of demand, as the demands goes up so does the price. At the same time, the rise of price encourages more bottles to be produced and supplied, according to the law of demand.
But what if the demands remain 200 people even though you have produced 300 bottles? The price will not increase because the supply is more than the demand. After the 200 people bought the bottles from you, the price for the 100 bottles left will be decreased, because at this circumstance your goal is just to sell out the remaining 100 bottles. You cannot aim to get more profit from them because your 200 customers already had the bottles, which mean your demand has reached the point where it starts to close up. Lower price of the remaining bottles will then attract the people who previously think that the price of $10 per bottles is too high for them.