Demand is the manifestation of readiness and ability of a prospective consumer to purchase certain measures of an item for a price that he can afford. As the price of any item increases, the consumer restrains himself from buying that item or if he needs that item urgently, he will buy in lesser quantity, “ceteris peribus”. Vice versa, if the price decreases, the consumer will buy more quantities, “ceteris peribus”. Supply is the manifestation of readiness and ability of a prospective seller to provide different quantities of items at different prices. As the price of an item increases, the seller provides more quantities of that item and vice versa, if the price of that item decreases, the seller doesn’t provide much quantity. He waits for the price to increase. Hence the supply decreases, “ceteris peribus”. In this paper we shall discuss the laws of demand and supply keeping in mind the microeconomics theory and not the macroeconomics.
Microeconomics: Concepts of Demand and Supply
The demand and supply concept is based on a high level of competition. The markets are full of buyers (consumers) and sellers and consequently, biddings can be done. The consumers bid for paying more and hence increase the price. On the other hand, sellers bid for selling in lesser price and hence decrease the price. In between these two, there is an equilibrium point that is reached when all the biddings have been done and there is nothing for the buyers to offer more and nothing for the sellers to offer less. So it is understood that the Demand and Supply concept is more successful when there is more competition. In order to study the trends of ups and downs in the prices, it is very important to understand the reason for these fluctuations. So what actually are the Laws of Demand and Supply?
There are four basic Laws of Demand and Supply. The equilibrium price and the quantity are on the higher side if the demand increases and the supply remains the same. The equilibrium price and the quantity are on the lower side if the demand decreases and the supply remains the same. The equilibrium price is on the lower side and the quantity is on the higher side if the supply increases and the demand remains the same. The equilibrium price is on the higher side and the quantity is on the lower side if the supply decreases and the demand remains the same.
The table at ‘Appendix 1’ shows a typical Demand schedule and the chart at ‘Appendix 2’ shows the corresponding Demand curve. The downward slope signifies the inverse relation between price and quantity, ceteris paribus. As an example, when the prices of British goods come down, Americans will import more and subsequently the demand of pounds will increase. (Gwartney et al, 396)
Similarly, the table at ‘Appendix 3’ shows a typical Supply schedule and the chart at ‘Appendix 4’ shows the corresponding Supply curve. The upward surge shows that as the price gets higher, more quantity is supplied and vice versa, ceteris paribus.
There are various factors that have an effect on the demand of any particular commodity. As the income of the buyer increase, his buying power also increases. The prices of similar products have a great effect on the demand of that particular product. The taste of food products and the preference of any particular brand also affect the demand of other products. Finally, if there is a possibility of an increase in the price of any particular product in future, the present demand of that product will increase.
Similarly, there are various factors that have an effect on the supply of any particular product. If the cost of the product is high and the sales price is low (with a marginal profit), then the production is decreased and hence the supply is less. The implementation of modern technology reduces the cost of any product. In such cases, the profit margin becomes higher and hence the supply is more. If the price of any particular product is expected to rise in the near future, the manufacturer will decrease the production now, for more production later and hence there will be a decrease in the supply of that product. Suppose a special edition CD is released with a selling price of $20. Now because the previous surveys of the record company showed that the consumers will not prefer CDs higher than $20 price, they produced only ten CDs since the cost of production was high. (Investopedia)
After discussing all these points, it is evident that the laws of demand and supply are very important in determining the price of any product. Mercedes is a costly car because people have preference for it.