Laws of Supply and Demand and How They Affect Us

Only available on StudyMode
  • Download(s): 267
  • Published: November 1, 2010
Read full document
Text Preview
How, the Laws of Supply and Demand Affect Us
Supply and demand is the interaction that results in prices and quantities of products produced. Supply comes from the willingness of consumers to purchase a product at a certain price. Demand stems from consumer wants, and the willingness of the supplier to respond to this demand. Both determine the elasticity of a product. The responsiveness of demand and supply cause a product to become elastic, if the quantity in the demand curve changes increasingly. It becomes inelastic, if the quantity in the demand curve changes is minor. Economics provides an inside look into where product prices and quantities come from according to the consumer needs and wants. By understanding economics and the laws of supply and demand and price elasticity, the consumer can make decisions on what works best for him or her financially and personally. It is important to understand the basics of the law of demand and supply, in order to understand the basics of economics. Simply put, the law of demand states that “holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease” (Economics, 2010, p. 67); and, the law of supply states that “holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied” (Economics, 2010, p. 75). Another important definition to understand is market equilibrium. That is, “a situation in which quantity demanded equals quantity supplied” (Economics, 2010, p.78). When there is more of a product in supply than there is a demand for, a surplus of the product is in the market; conversely, when the product demand is greater than the product that is supplied, there is a shortage in the market. During a shortage, firms will raise the price, which also results in the increased of product supplied and decrease the quantity demanded which reduce the shortage. A surplus occurs, when firms have an increase in amount of product in inventory and will allow them to reduce the price in order for them to sell the product. Reducing the price results in the demand for the quantity of product in the market, this will produce a decrease in the quantity, supplied As we speak of demand, there are three events, which cause a rise in demand. They are a change in consumer taste, an increase in income, and the rise of the price of a substitute. If a documented study could show with proof that cherries fought breast cancer, more consumers would want to buy cherries because their tastes have changed due to the added benefit. If there is a raise in income consumers are able to make more deserts, and buy more cherries. The price of strawberries is high, causing consumers to buy more cherries, substituting cherries for strawberries. All of these situations cause the demand for cherries to increase, shifting the demand curve to the right. The shift of the demand curve to the right causes a shortage of cherries, which will raise the equilibrium price and the equilibrium quantity. A familiar topic concerning the shift of the economy directly relates to the price of crude. When Hurricane Katrina struck New Orleans in 2005, the alternating supply and demand of crude resulted in devastating effects to the economy. With an increased demand and a supply shortage for crude, the prices of oil, food, gasoline, and other products reached an all-time high. An increase or decrease in supply may cause the supply curve to shift to the right or left. Anytime there is a change in the market supply, the supply curve will shift. When a supply increase occurs, the end-result is dependent upon many variables. These variables could affect equilibrium price and quantity by causing an increase or decrease in supply. Depending on whether the result is an increase or decrease,...
tracking img