In economics, the law of demand and supply is the most fundamental law that helps to determine the prices of commodities. It is useful for both producers and consumers as it guides them when and how much to produce and how much to buy. This article would be easy guide in understanding the law of demand and supply.
The law of demand and supply is a fundamental concept in economics that illustrates how the price of goods and services is determined in a market economy. At its core, demand refers to the quantity of a product that consumers are willing and able to purchase at various price levels, whereas supply pertains to the quantity that producers are willing to sell at those same price points. These two forces interact to establish the equilibrium price where the quantity demanded by consumers equals the quantity supplied by producers.
Understanding the law of demand and supply
For layman’s understanding, prices are determined by relationship of demand and supply of goods and services in the market, given the other factors are constant.
If the demanded quantity of commodity exceeds supply, the prices of the given commodity will rise. And, if the demanded quantity of commodity is less than the supply, the prices of the given commodity will fall.
In simple term, if there is more supply, prices will fall. And, if there is lesser supply, prices will rise. Let’s look at the following relationship between demand and supply. Here is the possibilities of rise and fall of prices in relations with demand and supply.
1. Demand > Supply = prices will rise
2.Demand < Supply = prices will fall
3.Demand ~ Supply = Equilibrium
Market competition, market equilibrium and market failure
If there is no barriers to entry and exit for the new entrants in the market, and the prices of the commodity are fully determined by the free market forces of demand and supply, it is termed as open and competitive market. There is no single buyer and sellers. No one is price maker but taker, there are many players in the market selling identical commodity.
Market equilibrium and market failure
On the other hand, if there are external restrictions by government, the prices of commodity will be either rise or fall, in such situation, market fails to allocate resources efficiently, it is known as market failure.
Hence, it is highly essential to let the market function naturally driven by the market forces of demand and supply.
In case of market equilibrium, the demand and supply of the commodity is same and there is no change in the prices. The perfect market equilibrium is a hypothetical and hardly possible in the today’s market.
How does law of demand work?
Demand is influenced by several factors including consumer preferences, income levels, and the prices of related goods. When prices decrease, the quantity demanded generally rises, and conversely, when prices increase, the quantity demanded tends to fall. This inverse relationship is a key characteristic of the demand curve, which slopes downward from left to right on a graph. Understanding demand is essential for analyzing consumer behavior and market dynamics.
The law of demand explains how the prices of commodity will determine the commodity demanded by consumers. If the prices are more, there is lesser demand for quantity. And, if the prices are less, the demand would be more on condition that other factors are constant.
Suppose, you prefer to buy onions at the rate of 1$ per kg. Tentatively, this is the rate at which producers also prefer to sell theirs onions. Simply, this is the market equilibrium of onions.
Then, what would happen if there is fall in the prices? Obviously, consumers will buy more quantity than they would have not if the prices were more. In simple terms, if there is fall in the prices of onions, consumers will buy more quantity. On the other hand, consumers will buy lesser, if the prices are rocketing.
Explaining Demand curve
Demand curve is a graphical representation of relationship between prices and demanded quantity of commodity in the market. It shows downward tilt as the demanded quantity falls with rise in prices. Demand curve has been drawn with the help of X and Y axis. Y axis indicates prices, while Y axis indicates demanded quantity.
Explanation of the law of supply
In microeconomics, the law of supply explains how the prices of goods and services determine the supply of goods and services in the market, given other factors are constant. It shows the relationship between rise and fall in prices and it’s effect on supplied commodity. Higher the prices, greater the supply and vice-versa.
In other words, there is proportionate or positive relationship between prices and supplied commodity. Supply is influenced by factors such as production costs, technological advancements, and the number of suppliers in the market.
Typically, as the price of a good increases, the quantity supplied also rises, reflecting the positive relationship depicted by the upward-sloping supply curve. Producers are motivated to supply more of a good when they can receive higher prices, leading to an increased willingness to enter the market at those price points.
Describing supply curve
Supply curve is a graphical representation of supply of commodity in relations with prices. It is drawn on the X and Y axis. X axis indicates supplied commodity, while Y axis shows prices of commodity in market. Supply curve shifts upward from left to right as the supply increase. Compare to demand curve, it shows reverse Or opposite pattern.
Importance of the law of demand and supply
The interplay between demand and supply is vital in determining market prices, as shifts in either curve can result in changes in the equilibrium price. The interaction between these two forces establishes market equilibrium—the state where the quantity of a good demanded by consumers matches the quantity of that good supplied by producers. This equilibrium is crucial because it signifies a balance in the market, resulting in stable prices and efficient allocation of resources.
In micro economics, every individual economic unit strive to be more competitive by making commodity more cheaper than rivals to capture more market power.
Second, the law of demand and supply also known as market forces provide insight how invisible hand works to ensure market equilibrium without government interventions.
The law of demand and supply helps them to learn how to use factors of production more efficiently to achieve competitive advantage. Nowadays, when the market is expanding never before, the importance of the law of demand and supply become much more essential.
Present day example of law of demand and supply
Over recent years, consumer preferences have shifted towards devices with enhanced features such as larger screens and advanced cameras. As a result, manufacturers have responded by increasing production of high-end smartphones, leading to a reduction in prices for older models. This illustrates how the demand for innovative technology influences supply decisions and pricing dynamics.
Second, in the agricultural sector, the supply of agri commodity is significantly affected by weather conditions. For instance, in a year when adverse weather leads to poor crop yields, the supply of certain fruits and vegetables may decline sharply.
Simultaneously, if consumer demand remains steady or increases due to preferences for organic produce, this heightened demand combined with diminished supply results in soaring prices. This situation underlines the dependency of agricultural supply on external factors like climate and how these factors interplay with consumer behavior.
Finally,
Comprehending the principles of demand and supply is vital for many stakeholders, including consumers, businesses, and policymakers. These fundamental economic principles serve as the backbone of market operations, influencing pricing mechanisms and resource distribution across various sectors. Without a solid understanding of how demand and supply interact, individuals and organizations may struggle to make informed decisions that align with market realities.Microeconomics and macroeconomics
https://en.m.wikipedia.org/wiki/Supply_and_demand
https://m.economictimes.com/definition/law%20of%20supply%20demand