Theory of Demand and Supply: The Handbook for Students

 

Our main aim is to provide the academic writing requirements of the university, college and school students. Economics is one of the many subjects we study. In contrast to that, we have acquired ample experience while working on our different economics assignments and that is why we can guide the students to understand the theory of demand and supply better. This blog will be discussing the main points of the theory, which are demand, supply, and market equilibrium.

Demand and Supply Theory

The pillars of economics are on the demand and supply theory, which explains how prices and quantities of goods and services are determined in a particular market. This theory is the basis for all knowledge concerning markets and economics decisions making.

Demand

Demand is the quantity of a good or service that buyers are willing to purchase with different prices in a specific period.

Price: The law of demand is the relationship between the price level and quantity of the product demanded. When the price is reduced, the demand for quantity increases, and vice versa, when the price increases, the demand for quantity decreases.

Income: People tend to buy more normal goods as well as avoid inferior ones with the increase of their income.

Tastes and Preferences: Changing consumer sentiments and needs can cause sharp ups and downs in the demand. Next, consider an instance where certain products are very popular the demand of course goes up.

Prices of Related Goods: The demand for the goods is impacted by the prices of competing products like substitutes and complements, for instance. The demand for the product will go up if the price of the substitute increases. Nevertheless, if the price of a complement rises, the demand for good also drops.

Expectations: This is due to the fact that consumer expectation from the future price and income will move the demand. On one side, if consumers feel that the price of the good will rise in the near future, they will purchase more quantity of it as soon as possible which will raise demand in the current period.

Supply

Supply represents the amount of goods or services that producers are able to sell at different prices during the defined time.

Price: Price is proportionate to supply in accordance with the law of supply. Whether the price increase will induce a higher quantity supplied or the price decrease will reduce the quantity supplied is uncertain.

Production Costs: The increased production expenses including the labor, materials and the operation costs may be the main cause of the supply side. Increasing production costs make the production of many goods unprofitable.

Technology: Technological developments might also extend supply through increasing efficiency of the production and decreasing the cost of production.

Prices of Related Goods: The supply of a good could be manipulated through the prices of related goods. This can be seen, for example, when the price of the alternative input in production increases they may produce the substitute goods, instead of supplying the product in its original state.

Expectations: Consumer's anticipated future price might be the determinant of the current demand. If they know that prices will be high, they may postpone selling now to get higher prices in the future.

Equilibrium

This is the point where supply is equal to the demand and therefore the price is the equilibrium of the market. Such an equilibrium price of the moment is also called the market-clearing price. It prevents the occurrence of any excess demand or excess supply in the market.

Surplus: If the price is higher than equilibrium price, quantity supplied is more than quantity demanded hence producing surplus. Producers can release their stock inventories by dropping the prices.

Shortage: When the price is lower than the equilibrium price, the quantity demanded will exceed the quantity supplied and there will be a shortage. Producers may increase their prices just to accommodate a situation where there is an excess demand.

Conclusion

Knowledge of the demand and supply theory is critical for those students who study economics. It informs us how markets work and how the prices are set. Royal Research takes pride in Students’ achievements by providing quality academic writing services on academic contents. If you have any papers to be written, e.g., essays, theses, assignments, classwork or case study, our team is the best for this task.

Drop by Royal Research now and see how we can work hand in hand in helping you achieve your academic goals. And tell you what we can do for you.

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