In this article, I will be discussing the law of supply and demand in economics. Keep reading till the end to find out about law of demand and excess demand!
What is the Law of Demand and Supply?
The law of demand and supply combines two of the fundamental economic principles that describe how changes in commodity, price of a resource, or even the product directly affect and alter the demand and supply system.
As the price steadily increases, the supply increases while the demand declines. On the contrary, if the price decreases, the market also increases.
The levels of demand and supply for different prices can be plotted on a graph in the form of curves. The cross-lapse of these curves marks the market-clearing price, equilibrium – at which it also demands price discovery and equals supply in the marketplace.
The Law Of Supply
The Law Of Supply actually relates to the changes in price for a product with the quantity that is supplly. On the contrary, the law of demand and the law of supply relationship is actually direct and not inverse. The higher the price is of a product, the higher the quantity supply. Lower prices indicate reduced supply, while all else is held equal.
Suppliers get more of an incentive to deliver a commodity or a product. when the prices are higher. The lower prices directly result in a “cost squeeze” that results in a curb in the supply graph. As a result, the slopes of supply are gently in upward sloping from left to right.
Demand also influences a type of disproportionate price change for a commodity that is essential.
The Law Of Demand
The Law Of Demand maintains that the charges for a product change are proportionate to its price, while everything else are equal. To explain it in other words, the higher is the price; the lower will be the level of demand.
Due to the buyers having finite resources, their expenditure on a given commodity or product is also limited as well. Hence, the higher prices decrease the quantity that is demand. On the other hand, if the product is set to be sold at a more affordable cost, then the demand rises.
Why Are They Important?
The Law of Demand and Supply is very crucial because it helps entrepreneurs, economists, and investors to both understand and predict market conditions.
For instance, a company that considers a price hike on a specific product will typically be expected to attempt an estimation of the price flexibility and also substitution effect in order to determine whether or not to proceed regardless.
Competition
Some economists have come up with models that perfectly explain the various types of markets. The universal one is “perfect competition”. Over here, there are large numbers of suppliers that are identical and many such people who demand the same product. The buyers and sellers can search for one another at simply no cost. And there is also no presence of barriers to stop novel suppliers from entering the market.
In a perfect form of competition, no one really has the ability to affect the prices. Both sides take the market as is given, and the market clearing price is mainly the one where there is neither excess of supply and nor excess of demand.
The suppliers can keep producing as long as they can sell the goods with a price that far exceeds the cost of making another one.
The Buyers go on purchasing for as long as they are getting satisfaction from consuming – and as long as that feeling is far greater than the price they are paying.
Balance Between The Supply and Demand
Clearly, understanding the balance between supply and demand is very crucial in many industries. The price is a critical factor that determines this form of balance – although it is not the only factor. The degree to which the cost affects demands significantly on the type of product that is marketed. It also depends a lot on the competitiveness of the said market.
For some of the non-essential items or goods, with many available substitutes for them, there is a very high demand in the elasticity, and the demand for the essential goods, like health care and gasoline, is relatively inelastic.
An instance of this would be if someone needs gas for their car to get to work then they will anyways pay for it no matter what the price, especially if there are no other options like public transit.
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FAQs
These are a few frequently asked questions that are related to the Demand and Supply of products:
A: An effective form of Demand has three characteristics – willingness, ability of an individual to pay for the product and desire.
A: An effective form of Demand has three characteristics – willingness, ability of an individual to pay for the product and desire.
A: A decrease in the demand is a direct result of the decrease in the price of similar substitutes, when it goes out of fashion, a reduction in income, an increase in the price of the complementary good, etc.
A: The factors that affect supply include the price of related goods, price of the goods, future expectations, production conditions, government policies, number of suppliers, and other associated factors.
To Wrap It Up!
The law of demand and supply are the essential components of any form of market. Hence, any slight changes in the curve of either can alter the whole market structure.
Thank you for reading up till here. I hope you found the information useful. Let me know in the comments your thoughts on the same.
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