Supply and Demand: An Initial Look
Understanding demand is initially understanding "preferences". What makes people buy the things they buy, is the fundamental psychological inquiry. The answer generally is "price". Some argued that buyers get attracted to commodities that are affordable and shun away from expensive ones.
The idea of price however, is hyperlinked to the concept of income. To one whose income is P50,000 a month may find a P10.00 sandwich cheap. But to a beggar whose earning could hardly reach P50.00 a day may find the same commodity expensive. The beggar, in his rational mind, would rather buy one kilo of rice as this would take him long for the entire day. But siince income is determined by other factor prices and demand is determined by goods prices, income and price are two different factors that affect demand.
Of course there are other reasons valid enough to explain the movement of current demand like population, war, net migration, tastes and preferences etc., but the factor that is naturally stable across time and place is price. And so making other factors constant, demand function, which is the summary of all the different price listings and the corresponding quantity demanded, slopes downward. And in the event that the total amount of demand changes irrespective of price but of other factors, the entire demand function shifts either upwards or downwards.
On the other hand, economists use another graph to summarize the factors influencing producer's decision and this is the supply curve. Notice that producers are more willing to sell as prices go up. Thus the line slopes upwards. Also, supply is influenced by factors not necessarily the same with those that affect demand but again the "price" factor is one of those parameters. Assuming an increase in supply not caused by prices, the entire supply function shifts positively. The opposite shift will likewise occur as supply diminishes not caused by price.
Since both curves have a common factor - "price" in them, it is possible for the curves to settle for an equilibrium condition.
In many cases though the government intervenes in an attempt to control prices. Price ceiling and price floors are situations altering market driven equilibrium. What do you think are the effects on these? Try considering a few.
Read the following sources for fun and hints: http://academic.udayton.edu/johnrapp/PartOneNotes.htm
http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
http://www.tutor2u.net/quiz/economics/jbc_econ_elasticity_1.htm
http://www.netmba.com/econ/
Terms to understand:
1. quantity demanded
2. demand curve
3. supply curve
4. quantity supplied
5. equilibrium price and quantity
6. surplus
7. law of demand and supply
8. Shortage
9. price ceiling and price floors
10. shifts in demand
11. shifts in supply
12. movements along demand and supply curves
The idea of price however, is hyperlinked to the concept of income. To one whose income is P50,000 a month may find a P10.00 sandwich cheap. But to a beggar whose earning could hardly reach P50.00 a day may find the same commodity expensive. The beggar, in his rational mind, would rather buy one kilo of rice as this would take him long for the entire day. But siince income is determined by other factor prices and demand is determined by goods prices, income and price are two different factors that affect demand.
Of course there are other reasons valid enough to explain the movement of current demand like population, war, net migration, tastes and preferences etc., but the factor that is naturally stable across time and place is price. And so making other factors constant, demand function, which is the summary of all the different price listings and the corresponding quantity demanded, slopes downward. And in the event that the total amount of demand changes irrespective of price but of other factors, the entire demand function shifts either upwards or downwards.
On the other hand, economists use another graph to summarize the factors influencing producer's decision and this is the supply curve. Notice that producers are more willing to sell as prices go up. Thus the line slopes upwards. Also, supply is influenced by factors not necessarily the same with those that affect demand but again the "price" factor is one of those parameters. Assuming an increase in supply not caused by prices, the entire supply function shifts positively. The opposite shift will likewise occur as supply diminishes not caused by price.
Since both curves have a common factor - "price" in them, it is possible for the curves to settle for an equilibrium condition.
In many cases though the government intervenes in an attempt to control prices. Price ceiling and price floors are situations altering market driven equilibrium. What do you think are the effects on these? Try considering a few.
Read the following sources for fun and hints: http://academic.udayton.edu/johnrapp/PartOneNotes.htm
http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
http://www.tutor2u.net/quiz/economics/jbc_econ_elasticity_1.htm
http://www.netmba.com/econ/
Terms to understand:
1. quantity demanded
2. demand curve
3. supply curve
4. quantity supplied
5. equilibrium price and quantity
6. surplus
7. law of demand and supply
8. Shortage
9. price ceiling and price floors
10. shifts in demand
11. shifts in supply
12. movements along demand and supply curves
posted by Asalamu Alaikum Ramsara! at 7:13 AM
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