Introduction to Demand & Supply
Consumer needs and availability of the good/ service are fundamental aspects in the market and economic system that determine how the quantity of a good or service is going to be related to its price. Both these concepts are used to analyze the market conditions and the corresponding price levels of different products. Now it is time to proceed to the definition of two rather obvious but nonetheless crucial ideas: the law of demand and the law of supply. Law of Demand: The law of demand can be expressed stating that the quantity demanded for a commodity move in the opposite direction to the price of that commodity, other things being equal. In other words, peoples’ willingness to purchase a good rise when the price of the good drops or falls when the price rises controlling for other factors.
Law of Supply: The law of demand defines the nature of relation between the price of a commodity and the quantity demanded of that particular commodity: the principle states that an increase in the price of a commodity will result into an increase a demand for that product with other factors kept constant..png)
Important Facts about Law of Demand and Supply
‰ With all other things being equal there exists an inverse relationship between the price of the commodity Px and the quantity demanded Qx , this is as stipulated in the law of demand whereas there also exists direct relationship between the price of a commodity Px and the quantity supplied Qs which is as taken under law of supply.
‰ Both these laws articulate it in terms of quality. These only give a signal of the change in the amount demanded/supplied and not the actual amount of change.
‰ The laws do not prescribe any direct ratio between the increase or decrease in the price of a product or service, and any such simultaneous alteration in the quantity demanded or supplied. As it can be seen, if Px increases by 5%, Qx can decline by any pitch; or if Px decreases by 5%, Qx can increase by any measure.
‰ The laws are partial. They do not discuss here any impact of a change in quantity on the price, but indicate clearly the impact of a change in the price on quantity demanded/supplied. What is more let us go a bit further to understand the general demand and supply. Meaning of Demand and Supply Having this brief idea of laws of demand and supply, it is now necessary to know what these two terms actually mean. Demand: Concerning the demand for a particular commodity it is defined as the quantity of a particular good a consumer/s is/are willing to purchase at a certain price over a certain time span.
“The demand for anything, at a given price is the amount of it which will be bought per unit of time at that price”: Prof. Benham
Thus, essential characteristics about demand comprise: ‰ Quantity of the commodity ‰ Price of the commodity: ‰ Having a particular duration of time ‰ Willingness to buy
Kinds of Demand Broadly speaking, demand can be categorized into three types:
1. Price Demand: It concerns the different amounts of a product that consumers are ready to purchase at given price levels. All other factors are unchanged and demand depends on price. This is the groundwork on which is built for the ‘Law of Demand’.
2. Income Demand: It means the various amounts of a related product that a consumer is willing to buy at various income levels, holding another variable constant. Therefore, it will remain true that the quantity demanded for a certain commodity cannot exist apart from income.
3. Cross Demand: Here the demand for a commodity depends on the price of like product, be it an inferior or allied product. All things being equal, demand for a commodity X, will directly be influenced by the price of another related commodity Y. But what do we refer to by substitutes and complementary goods? Substituted Goods: These goods can be substituted for one another so as to meet some specific want. Substitute goods consist of tires and tubes, Coca Cola and Pepsi, sugar and jaggery, tea and coffee etc. These goods are also referred to as ‘competitive goods’ because they offer stiff competition to one another.
Complementary Goods: Once again, these are goods that are utilized jointly to meet a particular requirement in people’s lives. For instance, car and petrol cement and brick etc. Supply: It defines the amount of a particular product that the seller;either the producer or firm, is prepared to supply or sell in the market at some particular measure of time and price. Thus, essential characteristics about supply comprise: ‰ Availability or stock with regard to the chosen commodity ‰ Pricing policy of the commodity ‰ That period of time ‰ Willingness to sell There is so much difference between supply and stock, that one need to be very vigilant while choosing a wrong word. Let us have a look at the points of differences between the two terms:
| Supply | Stock |
| It is the quantity of goods offered for sale in the market | It is the quantity of goods not offered for sale in the market. |
| It is a part of stock | It is larger than supply |
| It is a flow concept and is measured during a given period of time | It is not a flow concept and is measured at a particular point of time |
| It depends upon stock and price. It changes with a change in price. | It depends upon production. It indicates fixed quantity and is not related to price of the commodity. |
| It is available in the market for sale | It is kept in warehouses to support supply |
Till now we have got the basic understanding about the terms demand and supply. We now move further to discuss the demand function and supply function.
Summary
‰ Demand and supply are two important aspects to regulate effective functioning of markets.
According to the law of demand, as soon as the prices for a commodity goes up, the demand for it tends to fall,
subject to certain exceptions. Contrary to this, in the case of supply, with an increase in price of a commodity,
its supply will also increase in the market, again, subject to certain exceptions.
‰ It is important to know that forces of demand and supply are governed primarily by the price factor,
however, many other factors also contribute to the same. When demand and supply are represented graphically,
any change due to the price factor causes the curves to move upwards or downwards. But if the change is due to any
other factor other than price, there is a rightward or leftward shift in these curves.
‰ When in a market, quantity demanded is same as quantity supplied, the market attains the point of equilibrium.
Any further change in demand or supply affects market equilibrium, thereby bringing about a change in equilibrium price
and equilibrium quantity. In real-life scenario, government also tries to create market equilibrium so as to protect
the interests of consumers and producers both. It adopts strategies like price ceiling and price floor to create equilibrium.
‰ Thus, understanding the concepts of demand and supply and associated factors help economists, government bodies,
producers, consumers etc. to understand markets.
Key Word
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