Law of supply and demand

When we discuss the subject of economics, terms such as supply, demand, and equilibrium price are
often mentioned. It is also common to see graphs which contain the supply and demand curve. We might
ask, why are these terms so important when discussing economics? The answer is because these terms
are the key components in the subject of economics. Therefore, before we can fully understand
economics we must first understand the terms and how they are related.
Demand can be described as the relationship between the price and quantity demanded for a particular
good or service in specific circumstance. For each price provided, the demand relationship will tell the
quantity that the customers are willing to purchase at a corresponding price. The quantity the customers
are willing to purchase at a particular price is called the Quantity Demanded. An important thing to do is
distinguish between demand and the quantity demanded. To explain the concept, the buyers are the
people who want or need the product or service. The term “demand” refers to the willingness and ability of
customers to purchase the good or service in the market. The demand relationship expresses the
willingness and ability for the whole assortment of prices. To claim that a customer has a demand for a
particular item is to declare that the customer has money with which to buy the item and is willing to
exchange the money for the item. Customers do not demand what they do not truly want or need;
therefore, a want or a need that lacks purchasing power is not a demand. With that in mind, it is not
enough that the suppliers possess the good or the ability to perform a service. Economists usually treat
supply symmetrically as demand. This means that they treat supply as a correlation between price and
the quantity supplied. Supply also means willingness to sell, and the supplier must be willing to sell the
item or service at a price that the customers will demand it. Demand is not a particular quantity since the
quantity that people are willing and able to purchase will change in response to the price changes. There
is a methodical relationship between the price in the marketplace and the quantity that customers are
willing and able to purchase. This relationship is called the “demand relationship.” The amount that
customers buy at each price level is called the “quantity demanded” at that price.
In economics the relations of supply and demand is understood as the equilibrium. Think of demand as a
force which tends to increase the price of a good or service. Then think of supply as a force which tends
to reduce the price. When the two forces are balanced, the price will neither increase or decrease they
will be stable. This analogy allows us to think of the stable or natural price in a particular market as the
equilibrium price. This type of equilibrium exists when the price is high enough that the quantity supplied
equals the quantity demanded. On a diagram the equilibrium is the price at which the two curves
intersect. The subsequent quantity is the amount that will be traded in a market equilibrium.
The Law of Demand states that the demand curve is downward sloping. There are two types of change in
demand. The first is movement along the demand curve, and the second is a shift among the demand
curve. A movement along the curve is usually caused by a change in the price of the good or service. For
example, a decline in the price of the good results in an increase of demand. An increase in price causes
a reduction of demand. A shift in the demand curve is generated by a change in any non-price factor of
demand. The curve can shift to the right or left depending on the situation. A rightward shift represents an
increase in the total quantity demanded, as shown with D1 to D2, while a leftward shift signifies a
decrease in the total quantity demanded shown with D1 to D3.
These movements can be caused by several factors. A change in customer’s income such as when their
income increases will affect the demand. When this occurs customers usually buy more normal or luxury
items and the demand curve will shift to the right as shown with D1 to D2. Another change factor is when
there is a change in price of supplementary goods. If the price of a substitute good increases then the
demand for the good will decline. This will cause a leftward shift in the demand curve of any
complementary good D1 to D2. The reverse can also occur. If the price of the substitute good rises, then
the demand for the other good will increase as the customers switch their purchasing patterns D1 to D2.
Changes in tastes and fashions also affect the demand. If a good becomes fashionable then the demand
for the good will shift to the right D1 to D3. Or the good can become outdated and the shift will move to
the left.
Demand is the relationship between the price of the item and the quantity that consumers are willing to
buy. Supply is the relation between the price and the amount that producers are willing to sell. When we
apply these two concepts, we discover the market equilibrium with the price and quantity at the
intersection of the supply and demand chart. When we tie all of the concepts together we can identify a
price high enough that the quantity demanded will be equal to quantity supplied as well as the quantity
corresponding to that price.