Supply and Demand Paper

Topics: Supply and demand, Externality, Economics terminology Pages: 5 (1599 words) Published: May 20, 2013

Monica Minj SUID: 1834386 Seattle University

Supply and Demand
Supply and Demand is the most fundamental concept in economics and it plays a vital role in determination of price of goods in the market. Supply is the ability of a market to offer a product at a particular price and demand is the quantity of a product or service demanded by the people at a given price. The correlation between the price and quantity supplied is known as the supply relationship whereas the relationship between the price and quantity demanded is known as the demand relationship. To analyze the concept of Supply & Demand, we assume that we have a perfectly competitive market, which is a market where we have so many buyers and sellers for a product that no single buyer or seller can affect the price in the market. From economics point of view, the businesses have to see the demand and supply as two forces that act together to determine the price for various goods.

Law of Demand
Law of demand states that, higher the price of goods, lower the demand for that good will be. When the price of a good goes up the quantity of that good purchased by the buyers goes down as it prevents them from buying other goods that they could have bought. The demand curve is a negative slope as shown in the diagram below.

D1, D2 and D3 are three points on the demand curve. From this curve we can clearly see that if the price of the good is increased, the quantity demanded will go down(D1), and when the price is decreased the quantity demanded will increase(D3) which makes the price and quantity demanded inversely proportional to each other.

Law of Supply
Similar to law of demand, the law of supply shows the relationship between price and quantity supplied. But unlike demand, supply has a positive slope as shown in the diagram below. This means that sellers are willing to supply more goods with increase in price as it brings them greater revenue. In other words, higher the price, greater will be the quantity supplied.

S1, S2 and S3 are three point on our supply curve. This curve clearly demonstrates that when the price for the good is increased the quantity supplied will also be increased(S3) and when the price is decreased the quantity supplied will subsequently be decreased, which makes the quantity supplied directly proportional to the price of a product.

We have seen how the supply and demand curves look individually. Now let us put these together and see what happens.

When we put the supply and the demand curves on the same plane we get an intersection point. This intersection point is called the Equilibrium point and for good reasons. At equilibrium point the supply and demand are equal. This implies that the amount of goods being supplied is exactly equal to the amount of goods being demanded at a particular price. Both the buyers and the sellers are satisfied at this point and the market is said to be in equilibrium. A change in demand and supply can always change the equilibrium point by an increase in demand or supply. Excess Supply Excess supply occurs when, at a given time, the equilibrium price of the market is less than the price that the goods are supplied at.

At Price P the quantity demanded(QD) is much less than the quantity supplied (QS). This means that the goods that are being supplied are not being entirely consumed which would lead to a surplus of goods in the market. The producers are trying to make more goods to increase revenue but the higher price leads to fewer number of people buying those goods and a lot of it goes waste. This will eventually reduce the price of the good and force the market back to equilibrium. Excess Demand Excess demand occurs when demand outweighs supply. This means that there is a shortage of goods.

At price P, the quantity demanded(QD) is much greater than the quantity supplied(QS). However, since the demand of the good is really high, it would lead to...
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