Do you know the price of anything you buy? Obviously, yes. But most of the people don’t know the backbone of the price i.e. Demand and Supply. Therefore, these terms play an important role in deciding the price of a commodity.
Let’s learn these concepts clearly:
- Concept of demand
- Law of demand
- Demand curves
- Concept of supply
- Supply curves
- Market equilibrium
- Determination of market equilibrium
- Frequently asked questions
Concept of Demand
Ordinarily, the terms desire and demand are used interchangeably. But in economics, demand has a distinct meaning. Supposing, you desire to have a LED TV, but you do not have enough money to buy it. Then, this desire will remain just wishful thinking; it will not be called demand.
And, if in spite of having enough money, you are not willing to spend it on LED TV, demand does not emerge. The desire becomes demand only when you are ready to spend money to buy LED TV.
Thus, demand for a commodity is the desire to buy a commodity with sufficient purchasing power and willingness to spend.
There are two terms i.e. demand and quantity demanded. Some person considers these terms as same but both are different from each other.
Demand: It refers to different possible quantities of a commodity that the consumer is ready to buy at different possible prices.
Quantity Demanded: It refers to a specific quantity to be purchased against a specific price of the commodity.
Demand Schedule: It refers to the table showing the relationship between different quantities to be purchased at different prices of that commodity.
“The table relating to price and quantity demanded is called demand schedule”
Demand curves are always created on the basis of demand schedule.
Table 1: Demand Schedule of Apple
Table1. shows that as the price of apple increases, the quantity demanded tends to decrease. When the price is 1rs., the consumer demands 4 units and when the price rises to 4 then the consumer’s demand tend to decrease to 1 unit.
Demand curves are always drawn on the basis on a Law named Law of Demand. Let’s understand this clearly:
Law of Demand
It states that, other things remain constant, quantity demanded increases with a decrease in own price of commodity, and vice versa. In other words, we can say that quantity demanded and price has an inverse relationship and other things remain constant.
The term ‘other things remain constant’ implies that other determinants ( affects the demand ) excluding price remains constant.
Let us know more about Demand and supply curves.
Demand curve is a graphic presentation showing how quantity demanded of a commodity is related to its own price.
It is prepared with the help of demand schedule which we talked earlier.
It has two types:
1. Individual demand curve,
2. Market demand curve.
Individual demand curve: It is a curve showing different quantities of a commodity that one particular buyer is ready to buy at possible prices. In other words, we can say that it shows demand curve of a Individual buyer.
Fig1. Shows the demand curve for the individual buyer. Quantity is showed on X-axis and price on Y-axis. D is the demand curve.
Demand curve has a downward slope which indicates the inverse relationship between price and quantity. It implies that buyer intend to buy more quantity at less price.
Market demand curve: It refers to a curve showing the demand for the whole market not for an individual. In other words, it is the sum total of an individual’s demand curve which means every individual’s demand curve is integrated in order to make the whole market demand curve.
For example, A and B are two buyers in market. Fig.2(i) is A’s demand curve. Fig. 2(ii) is B’s demand curve. Fig.2(iii) is the market demand curve. When the price is 1rs. , A’s demand is 4 and B’s demand is 5 . Accordingly, market demand is 4+5=9 when the price is 1rs.
Let us know about Demand and supply curves.
Concept of Supply
Ask a producer: how much of a number of goods he willing to sell? ‘Depends on price’ should be hi obvious answer and that the right. At a higher price, he should be willing to sell more, while at a lower price, he should be willing to sell less. Accordingly, that’s the concept of supply.
In other words, we can say that it is completely reverse of demand. In demand, consumer wants to buy more at a cheap price but on the other side, the seller wants to sell less at cheaper price. Both wants to maximize their profit.
Sometimes we consider supply and stock as same concepts but they are not. Let understand it with an example:
Suppose, A seller has 100 tones of wheat and prevailing price 500rs. per ton. Seller is ready to sell only 10 tones of wheat at this price. In this case, 100 tones is stock and only 10 tones is considered as supply.
Stock of goods refers to total quantity which is available with the seller at the point of time and Supply refers to that part of stock which a seller is presently ready to sell at a given price.
Supply and Quantity Supplied:
Supply: It refers to schedule showing various quantities which a seller is ready to sell at different possible prices.
Quantity Supplied: It refers to specific quantity which a producer is ready to sell at specific price.
Supply schedule of apple in the above table, different quantities are shown with the different price, these are all supply, and the seller only agrees to sell 30 units at the price of 15, this is the quantity supplied.
Law of supply: It states that other things remaining constant, quantity supplied increase with an increase in the price of a good. This implies a positive relationship between price and quantity supplied. Thus, more at supplied at a higher price and less at a lower price.
Table 3: Law of supply
Table 3 shows that the quantity supplied increases from 100 to 200 units when the own price increases from rs.10 to rs.11 per unit. Likewise, it increases from 200 to 300 units when price increases from rs.11 to rs.12 per unit. Implying that there is a positive relationship between their own price and its quantity supplied.
It is graphic presentation of supply schedule, showing various quantities offered for sale at different possible prices of that commodity.
It also has 2 aspects:
1. Individual supply curve
2. Market supply curve
Individual supply curve
t is a graphic presentation of supply schedule of an individual firm in the market. In other words, it shows only supply curve of an individual seller.
This figure is drawn on the basis on schedule of individual supply. S curve has a positive slope, showing the quantity supplied increase in response to an rise in price.
Market supply curve
It is a graphic presentation of market supply which means it represents the whole industry not an individual.
A and B are two different firms. Figre© has market suplly curve. At rs. 10, A’s firms supply 10 units and B supplies 5 units. Therefore, total market supply is ( 10+5=15 ).
Slope refers to ratio between change in price and change in quantity supplied. Generally, slope of supply curve slopes upward, which indicates a positive relationship between price of a commodity.
Now, we have learned the concepts of demand and supply which implies that both seller and buyer always tries to maximize their profit but if this scenario always happens, then anybody does not believe on market because seller always sells at higher price and buyer wants to buy at lower price. That’s where market equilibrium stands.
Market equilibrium refers to state of market when demand for a commodity is equal to its supply, corresponding to price. Thus, in state of equilibrium, the market clears itself: market demand = market supply i.e. Dx=Sx. There is neither excess demand nor excess supply.
In that case, both buyer and seller agrees at a particular price..
In such situation, that price in market is called equilibrium price and Quantity supplied/demanded is called equilibrium quantity.
Determination of Market equilibrium:
Market equilibrium is determined by the forces of (i) market demand, and (ii) market supply.
Market equilibrium is struck when, at the prevailing price in the market, quantity demanded is equal to quantity supplied. There is no excess demand or excess supply in the market.
Figure 1 shows that when price of apple is rs. 5, market supply= 50 units and market demand = 10 units. This is situation of excess supply.
At a given price, producers are willing to sell more then what buyers are willing to pay. Pressure of excess supply reduce the market price. Supposing, the price reduces from rs. 5 to 44.
Reduction in own price leads to rise in quantity demanded and fall in quantity supplied. Consequently, quantity demanded increases to 20 unirs whereas supply reduces to 40 units.
Even at the price, market is not cleared: market demand<market supply. Pressure of excess supply still exists. This will lead to further reduaction in price. Now, it reduces to rs.3.
Now, demand increase to 30 units and supply reduces to 30 units. Tus, demand and supply both are equal at rs.3. Accordingly, rs.3 is the equilibrium price and 30 units is the equilibrium quantity.
Conclusion: Demand and supply curves
Hence, these are the curves on which all market depends. Also, demand and supply is influenced by many factors which also includes price.
FAQs: Demand and supply curves
Demand and supply curves intersect at a equilibrium point which normally termed as ‘E’. At that point, both curves are equal to each other.
Complementary goods are the goods that are consumed together like pen and ink. The demand and suppl curves also shift. If price of one good increase then the demand for other good decreases and shifts backwards and supply curve forward.
It refers to point where quantity demanded and quantity supplied equals or intersect each other.
A change in anything else that affects demand for labor causes a shift in the demand curve. Changes in the wage rate (the price of labor) cause a movement along the supply curve
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