Relationship between Demand, Supply and Price
Relationship between Demand, Supply and Price
Demand and its Influences
- Demand refers to the quantity of a good or service that consumers are willing and able to buy at a given price.
- Factors influencing demand include income levels, tastes and preferences, prices of related goods (complements and substitutes), population size and composition, and expectations about future prices or income.
Supply and its Determinants
- Supply refers to the quantity of a good or service that producers are willing and able to sell at a given price.
- Factors influencing supply include production costs, technology, prices of related goods in production, expectations about future prices, and the number of sellers in the market.
Price Determination
- The market price is the price at which the quantity consumers want to buy equals the quantity producers want to sell, also known as the equilibrium price.
- If the price is above equilibrium, there is excess supply and the price will tend to fall.
- If the price is below equilibrium, there is excess demand and the price will tend to rise.
Elasticity of Demand and Supply
- Price elasticity of demand measures how responsive quantity demanded is to a change in price.
- Price elasticity of supply measures how responsive quantity supplied is to a change in price.
- These concepts are vital for businesses making decisions about pricing and production levels.
Changes in Market Equilibrium
- Shifts in either demand or supply will lead to changes in the market equilibrium.
- An increase in demand or a decrease in supply will tend to increase the equilibrium price.
- A decrease in demand or an increase in supply will tend to decrease the equilibrium price.
The Role of Markets
- Markets facilitate the exchange of goods and services and enable the price mechanism to balance supply and demand.
- Markets can be physical locations like a farmers market or virtual like an online marketplace.