Demand and Supply

Many people have noted that in a free market the relationship between the demand for an item and its supply will have an effect on its price. On the other hand, changes in the price of a good or service can also affect demand and supply.

How are demand and supply curves derived?

A demand curve shows the relationship between price and quantity that buyers are able and willing to buy.

As the price changes, the quantity demanded moves up and down the demand curve.

A supply curve, on the other hand, shows the relationship between the price and the quantity that producers are willing and able to supply.

How can one find out what the demand for a product would be?

One can give surveys.

One can look at market data from previous studies.

You will have to determine how much of a demand there will be for a product at different prices.

In general, when the price for a product goes up, people will demand less of that product.

Conversely, if the price for that product should go down, people will want to buy more of it.

What are the determinants of demand?

Oftentimes a schedule (called a demand schedule) can be put together that shows how much of a good or service will be purchased at different prices.

The demand schedule and the graph of the demand curve are just different ways of presenting the same information.

The law of demand

One can also establish a supply schedule based on how much of a good or service will be offered at differing prices

The information contained in the supply schedule can also be depicted as a graph, usually in the form of a supply curve.

Economists maintain that eventually the matching of supply and demand will lead to what is called a market equilibrium, or price equilibrium. At the equilibrium point or price, supply = demand.

Of course, prices rarely remain constant. Also, producers and consumers do not always make decisions that are in keeping with market conditions. Producers sometimes produce too much of a good (which leads to an excess of supply) or too little (which leads to shortages). Instead of equilibrium, we have disequilibrium.

As prices change, supply of a good or service will usually change also.

What are the determinants of supply?

Price is often the main factor but not always; sometimes even if price remains unchanged, other things will cause the supply of a good or service to change

Again remember: a change in price will not cause the supply curve to change; quantity will be affected but not the curve itself. The only change will be along the supply curve. (See, for example, how in the diagram below a change in price will cause the supply of a good or service to decrease.)

Demand shifters

Demand shifters

Supply shifters