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Consumer Demand

Explaining supply, finding equilibrium, the bottom line.

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• Introduction to Supply and Demand CURRENT ARTICLE
• Is Demand or Supply More Important to the Economy?
• Law of Demand
• Demand Curve
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• What Is the Concept of Utility in Microeconomics?
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The law of supply and demand is a fundamental concept of economics and a theory popularized by  Adam Smith  in 1776. The principles of supply and demand are effective in predicting market behavior. Whether an individual is a manufacturer or a consumer, the supply and demand equilibrium is relevant in daily market transactions.

Key Takeaways

• The law of supply and demand was popularized by Adam Smith in 1776.
• Consumer demand for a good commonly decreases as its price rises.
• As prices of a good increase, producers manufacture more to realize more profits.

Consumer demand for a good commonly decreases as its price rises. The figure below depicts the relationship between the price of a good and its demand from the consumer's standpoint. The demand curve is portrayed from the view of the consumer, whereas supply graphs are drawn from the producer's perspective.

If televisions were priced at $5 each, then consumers would purchase them and probably buy more TVs than they need based on price. The demand will remain high. If the price is $50,000, this good would likely be considered a luxury good , and demand would be low.

Demand is the quantity of a good that consumers are willing and able to purchase at various prices at a given time.

This example assumes that product differentiation does not exist. There is only one type of product sold at a single price to every consumer. In this closed scenario, the item is not an essential human necessity such as food or shelter, does not have a substitute, and consumers expect prices to remain stable. 

The supply curve considers the relationship between the price and available supply of an item from the producer's perspective rather than the consumer's.

When prices of a product increase, producers are willing to manufacture more of the product to realize greater profits. Falling prices depress production as producers may not recover input costs. If the costs to produce a TV are $50, production would be unprofitable when the selling price of the TV falls below $50.

If television prices are $1,000, manufacturers will focus on producing television sets over ventures and provide incentives to build more TVs. The behavior to seek maximum profits forces the supply curve to be upward-sloping. 

An underlying assumption of the theory lies in the producer taking on the role of a price taker. Rather than dictating the prices of the product, this input is determined by the market, and suppliers only face the decision of how much to produce, given the market price. Optimal scenarios are not always the case, such as in monopolistic markets.

Consumers typically look for the lowest cost, and producers test their products at the highest price. When prices become unreasonable, consumers change their preferences and move away from the product.

A proper balance must be achieved where both parties engage in ongoing business transactions to benefit consumers and producers. In supply and demand theory, the optimal price that results in producers and consumers achieving the maximum combined utility occurs where the supply and demand lines intersect.

In What Types of Economies Are Laws of Supply and Demand Less Reliable?

If the economic environment is not a free market, supply and demand are not influential factors. In  socialist economic systems , the government typically sets commodity prices regardless of the supply or demand conditions.

Does the Law of Supply and Demand Determine Market Conditions?

Multiple factors affect markets on both a microeconomic and a macroeconomic level. Supply and demand guide market behavior but do not determine it. Supply and demand are important factors, and Adam Smith referred to them as the  invisible hand  that guides a free market.

Does the Law of Supply and Demand Apply Only to Consumer Goods?

The theory of supply and demand relates not only to physical products such as television sets but also to wages and labor. More advanced theories of microeconomics and macroeconomics often adjust the assumptions and appearance of the supply and demand curve to illustrate concepts like economic surplus, monetary policy, aggregate supply and demand , fiscal stimulation, elasticity, and shortfalls.

The market theory of supply and demand was popularized by Adam Smith in 1776. Consumer demand for a good decreases as its price rises. As prices rise, producers manufacture more to gain more profits. The optimal price that shows an equilibrium between supply and demand is where the supply and demand lines intersect on a graph.

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Supply and Demand Essay

In economics, the terms “Supply” and “Demand” are of fundamental importance to the discipline because they are the factors that drive all other related activities of the economy. Argumentatively, although the field is broad and these two are like the pillars that hold together everything else in place, the exchange of goods and services from the seller side and the buyer’s side. Simply put, the demand covers the customer side while the supply side covers the seller’s side, who provide the goods or service. So, this, paper will discuss in detail the two terms and extensively cover what they mean in the context of economic transactions and how they relate. Also, the paper will seek to explore the shifts in demand and supply; because they are not static but are subject to changes of either going up or going down- for both depending on various factors that will form part of the subsequent discussions of this paper.

At this point, it is important to note while they are closely related, it is not automatic that an increase will one will cause the same reaction for the other. Each independently responds differently to certain factors. However, in a state of equilibrium, the shifts are similar where if demand, increases the seller responds also by increasing their goods or services(Bas, et al. 4). For each, the discussions will revolve around meaning, application in the real-life, and the relationship with the causal agents that leads to particular changes. The figure below shows the relationship between demand and supply that will guide the subsequent discussions.

Figure 1 Relationship between Demand and Supply

Demand in the field of economics refers to the total amount of goods or services that consumers are able and willing to pay for it when it is at that price. In practice, demand is usually different at each price level which is the main factor that influences the patterns of consumers’ behavior. The price is used as the reference point of explanation because it usually reflects the value of a product and its utility preference to the buyer. In particular, just how much is a customer willing to pay and what amount of the product or service do they want for it at that price is what demand is all about(Bas, et al. 11). In some of the cases, a customer attending a fair on a hot day may be willing to pay more for a glass of lemonade than if they had attended the fair when the weather was cold. So, demand is the total amount of product that a consumer will be expecting in return for money of a certain value.

At different prices, the quantity will change because of the different factors mentioned in the subsequent parts of the paper. From this example, it is clear that the demands thus also exist at different levels; the first is the market demand for the product itself in the economy and the second is the aggregate collective demand of all the products that exist in the market for that economy. In the first level, the focus is the product itself in the context of the consumer, and for the second, it is all the products that are present in that specific jurisdiction. A good example is a demand for a GTI muscle automobile in the US may be 15 % while the demand for all cars in the US is 56%. Therefore, in the first example, the particular product is assessed individually within the context of the market while in the second level it is all products that the same, i.e. cars, that are calculated.

Supply, on the other hand as aforementioned represents the other side of the economic transaction divide, the suppliers. The suppliers’ framework is overly broad and is used to refer to all such factors that are elements of production including labor, money, and companies that collectively produce the goods to the buyer. Supply: therefore, this definition refers to the total amount of goods and services that the supplier is willing to produce and offer to the market at a certain price (Moheb-Alizadeh and Handfield 5). Using the earlier example, now the seller of the lemonade at the fair is willing to make a certain amount of the drink for the market at a particular price. So, for example, if the fair is hosted on a sunny day, the price is higher and thus he or she may be willing to produce more lemonade for the fairgoers. However, on a cold day when the price of the lemonade is lower, he may only be willing to produce a lower amount of lower to reduce. The price is used as the central incentive in an economy that is why in both cases it is the principal elements that are used to define both supply and demand. As stated earlier, the movements are not static but rather shift according to different factors.

The shifts in the demand and supply of the goods and services for a particular product is dependent primarily on the prices of the inputs that are used in the production of the goods and services such as labor, raw materials, tariffs attached to the product and technical resources involved in the production. Similarly, for the demand for a good or service shifts according to the prices set for the product or service (Mankiw 54). When the prices are higher and other factors remain constant regarding the product, the demand reduces and when the prices reduce, the demand increases. From this point of view, it is accurate to hypothesize that demand and supply shifts according to how the prices move when all other factors remain constant.

Works Cited

Bas, M., et al. “From micro to macro: Demand, supply, and heterogeneity in the trade elasticity.”  Journal of International Economics , vol. 108, 2017, pp. 1-19, doi:10.1016/j.jinteco.2017.05.001.

Mankiw, N. G.  Essentials of economics . Cengage Learning, 2020.

Moheb-Alizadeh, H., and R. Handfield. “Developing talent from a supply–demand perspective: An optimization model for managers.”  Logistics , vol. 1, no. 1, 2017, p. 5, doi:10.3390/logistics1010005.

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Introduction to Demand and Supply

Chapter objectives.

In this chapter, you will learn about:

• Demand, Supply, and Equilibrium in Markets for Goods and Services
• Shifts in Demand and Supply for Goods and Services
• Changes in Equilibrium Price and Quantity: The Four-Step Process
• Price Ceilings and Price Floors

Bring It Home

Why can we not get enough of organic foods.

Organic food is increasingly popular, not just in the United States, but worldwide. At one time, consumers had to go to specialty stores or farmers' markets to find organic produce. Now it is available in most grocery stores. In short, organic has become part of the mainstream.

Ever wonder why organic food costs more than conventional food? Why, say, does an organic Fuji apple cost $2.75 a pound, while its conventional counterpart costs $1.72 a pound? The same price relationship is true for just about every organic product on the market. If many organic foods are locally grown, would they not take less time to get to market and therefore be cheaper? What are the forces that keep those prices from coming down? Turns out those forces have quite a bit to do with this chapter’s topic: demand and supply.

An auction bidder pays thousands of dollars for a dress Whitney Houston wore. A collector spends a small fortune for a few drawings by John Lennon. People usually react to purchases like these in two ways: their jaw drops because they think these are high prices to pay for such goods or they think these are rare, desirable items and the amount paid seems right.

Visit this website to read a list of bizarre items that have been purchased for their ties to celebrities. These examples represent an interesting facet of demand and supply.

When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: that of a gallon of gas. Why was the average price of gasoline in the United States $3.16 per gallon in June of 2020? Why did the price for gasoline fall sharply to $2.42 per gallon by January of 2021? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept.

As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil.

This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities.

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Home — Essay Samples — Economics — Supply and Demand — Understanding Supply and Demand Dynamics

Understanding Supply and Demand Dynamics

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Published: Jan 30, 2024

Words: 590 | Page: 1 | 3 min read

Table of contents

Equilibrium, market dynamics and price changes, government interventions.

• Blanchard, Olivier and Jordi Gal"The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so Different from the 1970s?" in NBER Macroeconomics Annual, Volume 23. 2008.
• Mankiw, N.G. Principles of Economics, 8th ed., Cengage Learning, 2017.
• McConnell, Campbell and Stanley Brue. Economics: Principles, Problems, and Policies, 21st ed., McGraw-Hill Education, 2018.

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supply and demand summary

supply and demand , Relationship between the quantity of a commodity that producers have available for sale and the quantity that consumers are willing and able to buy. Demand depends on the price of the commodity, the prices of related commodities, and consumers’ incomes and tastes. Supply depends not only on the price obtainable for the commodity but also on the prices of similar products, the techniques of production, and the availability and costs of inputs. The function of the market is to equalize demand and supply through the price mechanism. If buyers want to purchase more of a commodity than is available on the market, they will tend to bid the price up. If more of a commodity is available than buyers care to purchase, suppliers will bid prices down. Thus, there is a tendency toward an equilibrium price at which the quantity demanded equals the quantity supplied. The measure of the responsiveness of supply and demand to changes in price is their elasticity.

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The ideas of supply and demand are very essential to finances, as they are the backbone of market economy. Demand is the competence or the enthusiasm of a consumer to buy manufactured goods at a particular price and given time. The total demanded relate to quantity of the good and services the customers are ready to buy.  Demand is recorded on a demand plan, and then plotted on a chart known as a demand curve which goes downwards. The mark stands for the link between cost and the quantity demanded. The quantity demanded is referred to the total of manufactured goods people are ready to buy at a definite price.

This link flanked by price and quantity demanded is called demand relationship. The law of demand states that while all other factors do not change, if a product is sold at a higher price, less people will ask for that commodity, in other terms, the higher the price of a commodity, the lower the amount demanded, and the inferior the price, the higher the quantity demanded. Consumers do not obtain large quantity of products when prices are high. This is because as the price of a product goes up, even the chance of buying the good is up. As a result buyers will naturally avoid buying a commodity that will make them to give up the spending of something else which is more vital.   In standard, each customer has a demand curve for any commodity that he decides to buy. The buyer’s demand curve is equal to the trivial utility curve. After adding up all the buyers’ curves, they end up making the market demand curve for that commodity. 

Supply indicates how much the sellers can offer to their buyers. The quantity supplied refers to the total amount of certain commodities producers are enthusiastic to supply to their consumers at a certain price. The connection between the amount of commodities supplied to the market and the price they are sold at is called supply association. Price is thus a reflection of demand and supply.  The law of supply indicates that the higher the price of a product, the higher the supply, and vice versa. Producers of commodities tend to supply more goods at a higher price because they’ll be selling at a higher profit or increased revenues. Supply involvement is a factor of time unlike the demand relationship.

Time is critical to supply because suppliers must adjust to the situation whenever there is a change in demand and price. For example, if there is increase in the demand and price of umbrellas in an unforeseen rainy season, suppliers may hold demand by using their making equipment more rigorously. However, if there is a climate change during the year, and the umbrellas will be needed, the change in demand and price will stay for long thus the suppliers will have to change their gear and making facilities to meet the lasting level of demand.

Supply and demand have relationship, and affects price in different manners. For example, if a certain item is costing very higher, the demand will decrease, and if the suppliers find an item has a high demand, they will increase its volume of production, and the selling price will go up. However, if demand and supply are equal, they are at equilibrium. Equilibrium refer to the price at which the amount demanded by the buyers and the amount that the firms are capable of supplying goods and services are equal.  In other words, the total commodities supplied is equal to the total commodities demanded therefore every person is satisfied with the recent economic situation. When supply and demand is equal, it is said to be at equilibrium; however, if the supply exceeds demand, demand exceeds supply, or the two are not balanced, there said to be points of disequilibrium.

Without a shift in demand or supply the market price will remain the same. A shift of demand or supply curve occurs when the amount of product’s demanded or supplied changes even though the price remains the same. Shift occurs due to certain factors rather than price. For example, the price of cooking oil is $4 and the amount of a certain type of cooking oil demanded increased from quantity 1 to quantity 2, there will be a shift in the demand for a certain type of cooking oil. Shifts in the demand curve means that the original demand connection has changed; this shows the quantity demanded has been affected by another factor and not the price. A shift in the demand connection would occur, if for instance, suddenly that type of cooking oil is the only type of cooking oil which is available in the market. There are other factors which might lead to a shift in demand curve these may include; if a substitute of a certain product increases its price or a complement of that commodity lowers its price. The consumers may as well want to change their tastes and preferences in favor of the product.

On the other hand, if the price for cooking oil was $4 and the amount supplied went down from Q1 to Q2, then there would be a shift in the supply of cooking oil. This will show that the previous supply has changed. This shows the amount supplied is affected by various factors other than the price. A shift in the supply curve would occur due to; for example, there might be a natural disaster which will cause the shortage of raw materials used to produce cooking oil thus there will be less supply. There other factors which may source a move in the supply arc, and these may include; development in the production technology will lead to high output and competence in the production process thus the supply will increase and lower the cost for businesses. Favorable climate will also lead to higher yields for agricultural commodities. 

Supply and demand is a basic feature in determining the character of the marketplace. This is because it is known to be the main determinant in location up the cost of commodities and services. The availability or the supply of commodities or services is a main indication in knowing the price at which those commodities or services can be obtained. For example, an industry giving some services but has not much competition in the area will be able to control the price than will an industry working in a highly spirited location. Accessibility establishes the pricing structures in the marketplace; however, demand must also be there.

For example, an industry may produce vast number of a product at a low cost, but if there is little or no demand at all for the manufactured goods in the marketplace, the manufacturing will have no alternative but to sell the manufactured goods at a very low price. On the other hand, if the marketplace shows friendly to the manufactured goods that is being sold, the industry can set up a higher cost for the product. This demonstrates that supply and demand are closely entangled economic perceptions. Definitely, this shows how supply and demand is regularly mentioned as among the majority basic in all of economics.

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Supply and demand is a basic feature in determining the character of the marketplace. This is the major determinant in setting up the cost of commodities and services. The law of demand equates extra things, as the price of a commodities rises, its quantity demanded falls.

Demand can be signified as the quantity of a product or service which is required by consumers, while the quantity demanded can be defined as the amount of a manufactured goods customers are willing to buy at a particular price; the two(demand and quantity demanded ) defines a demand relationship.  

Supply is what the market can offer. The quantity supplied is the quantity of goods producers are willing to supply at a particular price. The law of supply states that the higher the price of a commodity, the higher the supply, and vice versa.

Supply and demand have relationship, and affects price in different ways.  However, they are they are believed to be at equilibrium when both demand and supply are equal. However, if the supply exceeds demand, demand exceeds supply, or the two are not balanced, there said to be points of disequilibrium, resulting to shift.

A shift of demand or supply curve occurs when the amount of product’s demanded or supplied changes even though the price remains the same. Shift occurs due to certain factors rather than price. In demand, if a substitute of a certain commodity increases its price or a complement of that commodity lowers its price. The consumers may also want to alter their tastes and preferences in favor of the product. In supply, there other factors which may cause a shift in the supply curve, and these may include; improvement in the production technology will lead to high output thus the supply will increase. Favorable climate will also lead to higher harvest and the supply will be high.

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The everyday occurrence of buying a new car has profound lessons for the discipline of economics.  On the demand side, there are numerous factors that affect purchasing a new car.  For example, demand for cars might be influenced by changes in prices of substitutes: If the price for public transportation (whether for train, bus, or subway) or motorcycles decreases dramatically might lead to less demand for cars (Mankiw, 2001). That is because consumers can pay less money and still receive similar benefits.  Another key demand side factor is interest rates charged on car loans or the availability of credit.  Since a majority of cars are bought on credit, a reduction in interest rates would lower the cost of financing (and ultimately the car) making cars more attractive to consumers. By the same token, if the standards for credit availability were lowered, this might also lead to greater demand for cars.  A contraction in credit or higher interest rates would likely lead to a contraction in demand as the price of the car increases. Third, changes in advertising or fashion can affect demand via an individual’s preferences vis-à-vis car purchase.  For example, many car makers are making more energy efficient cars that have less of an impact on the environment.  Consumers that normally wouldn’t buy cars, or may consider other substitutes, may purchase cars deemed “environmentally friendly.” Or perhaps advertising that stresses cars made in the United States has a palpable impact on consumers and increases individual demand by moving the demand curve.  Lastly, consumer sentiment plays a key role in shaping demand for automobiles: During the depths of the global recession, demand for cars plummeted as consumer sentiment over the future, including the ability to make car payments, deteriorated. As the economy and consumer sentiment gradually improved, so did the market for automobiles.

There are three main factors related to the supply of cars (Baumol& Blinder, 2004).  The first factor is the price of inputs used in building cars.   Cars are composed of many parts that vary in price over time. If the prices of inputs increase, the manufacturer has to decide whether to raise the price of the car which may lead to decreased supply.  On the other hand, if there is a significant decrease in the price of inputs, the car manufacturer might be willing to supply more cars.  The second main factor in deciding supply is the market structure of the car industry.  Traditionally, the car industry is extremely competitive, particularly after car manufacturers from India and China have now started to export cars.  With an increase in the number of manufacturers, and arguably competitiveness in the car industry, manufacturers may choose to reduce supply in order to avoid the situation of unsold cars. On the other hand, if  there is an overall decrease in the number of manufacturers, other manufacturers may choose to increase supply to make up for lost production in the market.  The last main factor is the producer’s expectation in the production of cars.  For example, a producer may look at factors such as consumer demand and price in order to decide how many cars to supply in the market.  Future expectations are very important as car manufacturers typically make production decisions 1-2 years in the future based on existing trends.

Demand and supply for cars may also have an impact on complementary goods such as GPS tracking systems.  GPS systems are a complementary good because car manufacturers or consumers who purchase cars also purchase GPS systems.  Another complementary good for cars is gasoline.  Gasoline must be purchased in order for a car to properly operate.  Higher prices for cars may have an adverse impact on the quantity of gas purchased, especially during times of an economic downturn or high gas prices.  An increase in the price of gas may also influence the quantity and type of car purchased.  Due to the wide range of cars available, price elasticity plays a significant role in the type of car purchased.  For example, due to the segmented nature of the car market, lower-priced cars likely have a higher price elasticity of demand.  For example, if Ford raises prices too high on a lower-end model, consumers will likely simply purchase another type of car.  At the upper end of the car market, however, price elasticity of demand is likely quite low.  That is, if Mercedes raised the price of a car $5,000, it is not clear that a consumer would necessarily purchase a BMW instead.  This is because consumers at higher price levels are less sensitive to changes in price.

Mankiw, G.  (2001). Principles of Economics.   New York: Southwestern Press.

Baumol, W. & Blinder, A. (2004).  Microeconomics Policy.  New York: Southwestern Press.

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Economic Impact of Supply and Demand Essay

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The main objective of a free economic system is to utilize the resources of the country in such a way that the production of goods and services out of the available resources may be optimal. In essence, an economic system is characterized by the supply and demand of commodities which may be consequently affected by scarcity and choice as described in the following paragraphs.

The market supply of a commodity is the total quantities that firms are willing to offer and sell over some time period. This implies that firms are economic agents responsible for supply of goods and services. Thus, the law of supply states that provided other conditions is kept constant, when the price of a commodity increases the supply increases and vice versa (Hardwick et al., 1999). In this way existing firms expand their outputs and new firms will join the industry so as to take advantage of increased profitability and consequently safeguard increases. When cost of production of any commodity rises, supply falls and vice-versa due to the scarce resources. Other factors that affect supply include the price of other certain goods, price of factors of production, state of technology, expectations, government policies, and tastes of producers.

Demand is the quantity an individual is willing to buy at a given price over a period of time. It takes authority in the following: ability, time, and price specification. Furthermore, demand as opposed to want, need or desire is backed by purchasing power. For this reason, the law of demand states that provided other conditions are kept constant, when a price of a commodity increases the quantity demanded decreases and vice versa; there is an inverse relationship between the price of a commodity and quantity demanded (Hardwick et al., 1999). Demand and supply of a commodity are affected by the scarcity of resources and the choices made by economic agents. Scarcity is a relative term and it means less than requirement. The main cause of economic problems is the scarcity of resources at the disposal of human beings e.g. time, money, wealth e.t.c. A commodity is considered scarce when it is limited in supply. Choice is a selection of wants to satisfy from an ending list of wants that is necessitated by the fact that resources are limited. If there is change in taste and preference of a consumer, demand will not increase in spite of fall in price level.

Hardwick et al. (1999) assert that the society is faced with the following problems due to scarcity and choice: 1. the products to produce and their relative quantities, 2. methods of production to be used, 3. how the society’s output of goods and services is divided among its members, and 4. how competent is the current production and distribution. Consequently, scarcity has two elements – our wants and our means of fulfilling those wants. These can be interrelated since wants are changeable and partially determined by society. The way we fulfill wants can affect those wants. The degree of scarcity is constantly changing. The quantity of commodities and resources depends on technology and people’s action, which bring about production. Individuals’ imagination, innovativeness, and willingness to do what needs to be done can greatly increase available goods and resources. This implies that, although there is an improvement in technology, scarcity cannot be entirely eliminated since new wants are constantly changing.

For instance, the production of food may be in thousands of tons, but it is scarce because it is less than the requirements. If any commodity is available in greater quantity as compared to its demand then it will not be scarce; a good example is air. Furthermore, much of what people do reflects their rational self-interest. Using the choice concept, two things determine what people do: the pleasure people get from doing or consuming something and the price of doing or consuming something.

Price is the tool the market uses to bring the quantity supplied to the quantity demanded. Varying prices present motivation for individuals to change whatever they are involved in. Though, those incentives in the invisible hands guide us all. To understand economics we must understand how price affects our choices. That’s why we focus on the effect of price on quantity demanded as explained in paragraph three. We want to understand the way in which a change in price will affect what we do. For instance, on certain items we are penny-pinchers; on others we are big spenders.

In light of this, all human wants cannot be satisfied due to scarcity of resources. If there are so many wants and resources are not sufficient then only a few wants will be satisfied and in this case, choice will be made. It means that preference will be given to some wants as compared to others. The wants which have greater importance will be satisfied through the right choice. In essence, as almost people cannot have all the goods and services that they want, they have to make choices due to limited supply. With no rise in income, if someone wants to buy, for instance, a new coat they may have to spend less on eating out for a while. Similarly with limited resources, if a country wishes to devote more resources to health care it will have to reduce the resources it devotes to, for example, education.

Therefore economic agents need to understand the economic system so as to tell the direction that the demand and supply of a product would take if there are problems caused by scarcity and choice. Since needs and wants are far more than the resources available to satisfy them, the choices we can make are constrained not only by scarcity but also by political, legal, traditional, and moral forces. In other words, there are numerous non-economic forces that determine and mold our decision-making process.

Hardwick, P., Khan, B., & Langmead, J. (1999). An Introduction to Modern Economy. Upper Saddle River, NJ: FT Prentice Hall.

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IvyPanda. (2021, November 5). Economic Impact of Supply and Demand. https://ivypanda.com/essays/economic-impact-of-supply-and-demand/

"Economic Impact of Supply and Demand." IvyPanda , 5 Nov. 2021, ivypanda.com/essays/economic-impact-of-supply-and-demand/.

IvyPanda . (2021) 'Economic Impact of Supply and Demand'. 5 November.

IvyPanda . 2021. "Economic Impact of Supply and Demand." November 5, 2021. https://ivypanda.com/essays/economic-impact-of-supply-and-demand/.

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What is Market and Supply and Demand

Checked : Iris E. , Kamye B.

Latest Update 20 Jan, 2024

Table of content

What is the market?

Different types of markets, • the goods and services market, • the labor market, • the financial market, • the money market, • the foreign exchange market, supply and demand, a bit of history on supply and demand, supply, demand, and price, the interest of the supply and demand model, the law of supply and demand.

We live in a world which is often called a market economy, what does it mean and what economic principles does it imply?

A market is a real or fictitious place of exchange. On the market meet economic agents who offer a good service and others who come to get it. This creates a network of exchanges. These exchanges can be done in a physical place, with direct contacts or in a fictitious way, the contact then not being direct such as financial markets or internet sales. These exchange relationships are created around the product offered, its nature, its availability, its quality but also and above all, according to its price.

The major economic markets are linked to the types of products offered; there are 5 of them:

consumers (households, businesses, etc.) buy goods and services from producers (businesses, governments, etc.).

here, households sell their labor power to companies, administrations, etc. for a salary.

on this market, economic agents exchange securities such as stocks, for example. The share price is called their price.

it is a market frequented for the most part by banks where fiat money (notes) is exchanged for securities.

on this market,   foreign currency (foreign exchange)   is exchanged for national currency. Banks, businesses, and households are involved in this market.

Supply represents the number of goods or services (within the framework of the goods and services market) that economic agents are ready to sell on the market. The supply of goods and services comes mainly from businesses but also from administrations or associations.

Conversely, on the market for goods and services, demand represents the number of goods and services that economic agents are ready to buy. We, therefore, find households (final consumption) but also businesses (which make intermediate consumption or investments) or administrations (operating expenses, investments).

Supply and demand are aggregated functions that represent the addition of the behaviors of all the economic agents intervening in the markets.

Attention, on the job market, the supply of work comes from households, and the demand for work comes from companies, administration (it should not be confused with supply and demand of jobs). The work is exchanged at a certain price i.e., salary. The supply and demand are respectively the numbers of goods or services that the actors in a market are willing to sell or buy based on price.

• The TV offer in a country corresponds to the number of units for sale in all stores combined
• The demand for this same country corresponds to the number of TVs that customers want to buy.

If the theory of supply and demand covers an old intuition for Roger Guesnerie, its formalization began in 1838 when Augustin Cournot introduced the   demand curve. Later, Alfred Marshall introduced a supply curve representing supply according to prices. In the framework of the theory of partial equilibrium between supply and demand, at the intersection of these two curves are the price and the demand for equilibrium.

Supply is largely linked to the production of companies, which have a constraint expressed by their production cost, their turnover increases with the price of the goods or services sold. So if the price goes up, the turnover increases and the profit too. The offer is increasing according to the price.

The economic agents which form the demand, like households, in particular, have needed to be satisfied, but they have a constraint represented by their budget. So when the price of goods or services increases, they can no longer get as much as before, they must limit the quantities requested. The demand is, therefore, decreasing according to the price.

The interest of the supply and demand model is that it allows, outside the sophisticated formalism of the general equilibrium, to intuitively grasp the mechanisms at work in the decision to allocate resources in the economy of the market.

The offer of a good is the quantity of a product offered for sale by sellers for a given price. Unlike demand, that is the quantity of a certain product requested by buyers for a given price. The price of a good is considered to be a quantity dependent (among other things) on supply and demand.

From this principle, we derive a mathematical law, the law of supply and demand. This law is often generalized by a law of the markets, a name used to designate the law which governs a market, with or without the intervention of the state.

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The law of supply and demand often refers to partial equilibrium in a market. In markets where partial equilibrium applies, the following effects are seen:

• when the price goes up
• The supply tends to increase: producers are encouraged to offer more goods, new producers are encouraged to settle, holders of this good are encouraged to sell them.
• Demand tends to fall: the higher the prices, the less willing buyers are to buy.
• When the price drops, supply tends to decrease: Producers have less incentive to produce.
• Demand tends to increase: the lower the price, the more willing buyers are to buy.

It is presented differently, given a market where for each price, we combine supply (the quantity that all sellers want to sell) and demand (the quantity that all buyers want to buy). There is an intersection point that maximizes the number of exchanges. A price a little above will leave sellers willing to sell without a buyer. A price a little below will leave buyers willing to buy without a seller. In both cases, the number of exchanges will also be smaller than at the point of intersection. There will be buyers and sellers who will not be satisfied anyway, but it will be because of the price but not because they have not found anyone opposite.

A supply and demand curve corresponds to a given number of suppliers and applicants. An increase (or decrease) in the number of offerers or applicants causes a shift to the right or to the left, and therefore a change in the balance.

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