The demand for a good is the amount of the goods that the buyers are willing to purchase and the quantity which is demanded is the demand of the good at the particular prevailing market price. The main factor which determines the demand and supply of a product is the total price of the commodity (Colander, 2004). According to the law of demand, it states that if the price of a commodity is very high, then the people who will buy that commodity would decrease in numbers. If a price of a commodity goes up as shown in Figure1, the quantity that would be demanded would go down (Hashem & Pesaren, 1987). The main determinants in the demand for a commodity include the total income of the consumers, the consumer’s tastes and preferences, the market prices of all the other goods which are closely related, the expectations by the consumers about the future incomes and the future prices of the commodities, and the total number of potential customers (McConnell, 1998).
For example if the price increases from p3-p2, it shows that the quality that would be demanded would decrease from Q3 to Q2. The main reason as to why a producer can decide to increase the price of a commodity is because of an increase in the production costs of that product and due to this increase in the prices of the commodities (Krugman & Wells, 2005), it would further force the buyers to stop the consumption of the commodity or even to look up for a substitution product like for example if the pride foe crude oil goes up, the consumers may opt to use a cheaper mode of fuel like the natural gas. The demand curve is a downward sloping curve.
A movement along the demand curve shows that there is a change in both the unit price and the quantity which is demanded. A decrease in the price level of the commodity from P1-P5 would lead to an increase in the quantity demanded from Q1-Q5 as show in Figure 2.
A shift in the demand curve occur when the quantity of a commodity which is demanded changes with the commodity price being fixed or the price remaining unchanged (Colander, 2004). For example if the price for commodity x (crude oil) was $2, then the demand would shift provided that crude oil is the only fuel which is available for the consumers to consume, then the quantity which is demanded would increase from Q1-Q2 due to the shift in the demand from D1-D2.
The supply of goods and services is the total amount that the manufacturers and producers are willing to produce for sale in the market so that consumers can be able to buy and purchase. The quantity that is supplied by the producers is the total amount of goods and services that are made available for sale at the prevailing market prices (Duffy, 1993). The main determinants of supply of a commodity include the production costs, the technological advances that are used into producing a commodity, the market prices of all the other goods which are related, the general expectations of the firm and the expected future prices, and the total number of suppliers who are present in a market industry (McConnell, 1998).
As shown in figure 2, the supply curve is upward slopping and it shows that the higher the price of the commodity, the higher the total quantity of that product that is supplied. In this case, the producers supply more of the commodity because they would sell at a very high price which would increase the revenue of the producers. Points A, B, and C show the points of supply on the curve and an increase in the price from P1-P2 would bring about and increase in the quantity that is supplied from Q1-Q2 which would benefit the producer in terms of revenue.
The movement along the supply curve shows that there is the possibility that the supply relationship is consistent because the movement will occur due to a change in the price level of a commodity. The movement only occurs when there is a change in the quantity that is supplied where a decrease in the quantity supplied falls from Q1-Q5 leads to a decline in the price level from P1-P5 (Figure 5).
A shift in the supply curve occur when the quantity of a commodity which is demanded changes with the commodity price being fixed or the price remaining unchanged. The shift in the supply curve from S1-S2 showed that the quantity that was supplied decreased from Q1-Q2 with the price being held constant at $2. The variables that would affect the position of the supply curve to shift to the right are; A decrease in the price of other commodities making it possible to produce a commodity with unchanged price, a decrease in one or more factors of production used in the production of the commodity, an improvement in technology, and an increase in a government subsidy for a commodity. The variables that would affect the position of the supply curve to shift to the left are; an increase in the price of other commodities making it less profitable to produce, an increase in the production costs, an increase in indirect taxes which represents an increase in the costs of supplying a commodity.
In the short-run market supply curve, there are at least more than one input which is fixed which include the physical capital and the total number of firms which are available in the market. However, in the long run, these firms which are the producers of the commodities can be able to adjust their physical capital holdings which could enable them to be able to make adjustments to the quantity of commodities that they produce at any prevailing market price. In the long run, there is the possibility of new entrants into the market which symbolizes the presence of competition because firms can be able to enter and leave the market industry as they please according to the conditions of the industry market (Duffy, 1993).
The quantities which can be fixed are labor, the factory, labor, and raw materials. If we take the example of the commodity x (crude oil), it shows that if the demand for the crude oil is increased, there is the need for the company to put more efforts into producing more crude oil. The company on the other hand should be able to order the raw materials so as to respond to the demand in the crude oil where the raw materials in this case are considered to be the variable inputs. The company would require more labor, which can also be another variable input since the supply of labor could be increased (McConnell, 1998). The equipment may not be increased since it may take a very long time to come up with new equipment and it can also be very time consuming in the implementation of new equipment which makes equipment to be a fixed variable.
In the above example, production can be increased in the short run by the addition of labor and raw materials. But in the long-run, all the inputs are considered to be variable including the equipment and the factory itself. In the short run, only the firms which had been in the industry could be able to capitalize on the demand which had increased since they would have all the access to all the inputs of production. This means that in the long-run, there will be the presence of many other new firms entering the crude oil market since all the inputs needed in the production of crude oil will be available to the companies.
According to the law of supply, the higher the price is, the larger the quantity supplied. Equilibrium in demand and supply occurs when the quantity demanded equals quantity supplied. A stable equilibrium is said to exist when economic forces tend to push the market towards the equilibrium. The market or aggregate supply of a commodity is the alternative amounts of the commodity supplied per period of time at various prices by all the producers of the commodity in the market. It depends on all the factors that determine the individual producers supply and additionally on the number producers in the market.
The equilibrium of the economy is attained when the demand and the supply curve are equal as shown in the Figure 7 below which is at the point at which the supply curve and the demand curve intersects which shows that the quantity that is demanded is equal to the quantity that is supplied and at an equilibrium price at (p*) and quantity (Q*). At this point, the producers sell all their goods that they produce and the consumers on the other hand get all the commodities that they demand.
The general price of a commodity x is usually determined by the price of production which is the supply and the purchasing power which is the demand. Figure 8 below shows that there is a positive shift in the demand curve (from D1-D2) due to an increase in the quantity which was sold (Q) and the price. If there is an increase in the demand with the supply unaffected, than the quantity and equilibrium would be higher and is the supply is increased without changing the demand, and then it would lead to a very high quantity and a lower equilibrium price. The supply relationship is a factor of time since suppliers cannot react so fast to a change in the demand or price. So as an executive, it is very important determine whether the change in price would be permanent or temporary (Colander, 2004).
For natural gas the supply curve is upward sloping which shows that there is little indication of future technological improvement. An increase in demand for crude oil will raise the price and lead to an increase in the quantity supplied.