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Demand, Supply and Market Equilibrium

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Demand, Supply and Market Equilibrium

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  • June 18, 2013
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The term ‘price’ has a great relevance in economics. In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods and services. It is generally expressed in terms of units of some form of currency. But how does a product sell for a certain price, what constitutes the price of a product and how is the price determined is the bigger question. In economics, for a competitive market the prices for any individual product is determined by the market forces of Demand and Supply.

The demand for a product maybe defined as the quantity of the product that a consumer will purchase at the prevailing price during a particular period of time. The demand of a consumer if effected by: * Desire to buy

* Ability to buy, and
* Willingness to buy
Clearly the demand depends on the price of the commodity. Hence, the higher the price of an article, the lesser will be the demand of a rational consumer; other things remaining constant. This assumption of – other things remaining constant – is known as the ceteris paribus. This relationship between the price and quantity bought when expressed in a tabular format is known as the demand schedule. There is an inverse relationship between the price and demand for a product.

Demand Schedule The Graphical representation of demand schedule is known as the demand curve. The demand curve shows the price on the vertical axis and the quantity demanded on the horizontal axis.

The demand curve is downward sloping which is also called the law of downward sloping demand curve. This law states that as the price of the commodity is raised, ceteris paribus, buyers tend to buy less of the commodity (as is evident from the figure), and vice versa....