SSC Notes Economics – Theory of Demand and Supply
Demand and Supply is the most fundamental concept of economics and the backbone of the market economy.
Demand – Demand is an economic term that refers to the quantity of products or services that consumers wish to purchase at any given price level.
Supply – Supply is an economic term that refers to the total quantity of products whether goods or services available for purchase at any specified price.
Demand Relationship – The relationship between price and quantity demanded is known as the demand relationship.
Supply Relationship – The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, reflects supply and demand.
The relationship between supply and demand underlies the forces behind the resources allocation. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.
The Law of Demand
The law of demand states that the higher the price of the good, the lower its demand, provided all the other factors remain constant. The opportunity cost of the good is directly proportional to the price of the good. It means that the opportunity cost of buying that good increases as the price of a good goes up.
Demand Curve
Demand curve a graphical representation of the relationship between the quantity of the product demanded and the price of the product. It is drawn quantity demanded on the horizontal axis (X-Axis) and price of the product on the vertical axis (Y-Axis) of the graph. With a few exceptions, the demand curve is delineated as sloping downward from left to right because price and quantity demanded are inversely proportional to each other (i.e. the lower the price of a product, the higher the demand or number of sales).
The Law of Supply
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.
Supply Curve
The supply curve is a graphical representation of the relationship between the quantity of product that a seller is willing and able to supply and the price of the product. The quantity of the product supplied is on the horizontal axis (X-Axis) and the product price is measured on the vertical axis (Y-Axis) of the graph.
In most cases, the supply curve is drawn as a slope rising upward from left to right, since product price and quantity supplied are directly proportional (i.e. as the price of a commodity increase in the market, the amount supplied increases).
Time is an important factor to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So, it is very important to try and determine whether a price change that is caused by demand will be temporary or permanent.
Market Equilibrium
When demand and supply are equal (i.e. when the demand function and supply function intersect) the economy is said to be at equilibrium. At this intersection point, the allocation of goods is at its most efficient state because the amount of goods being supplied is the same as the amount of goods being demanded. Thus, everyone i.e. individuals, firms, or countries, is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they produced, and consumers are getting all the goods that they demanded.
