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Wednesday, June 3, 2009

Supply and Demand

Supply and Demand: Basics of Economics

  • Concepts and practices related to supply and demand and the laws of supply and demand are the basics of economics.
  • Market economy is largely dependent on supply and demand.
  • Price, supply and demand are interconnected with each other.
  • Laws of supply and demand have a bearing on allocation of resources.


  • Quantity of goods and services desired by the buyers is called demand.
  • Buyers decide the quantity to buy based on the price.
  • The quantity demanded in relation to the price is called demand relationship.


  • Quantity of goods and services offered in the market in called supply.
  • Suppliers decide the quantity to supply based on the price they can get in the market.
  • The quantity supplied in relation to the price is called supply relationship.

Law of Supply

  • At higher prices suppliers are willing to offer more products and services for sale than at lower prices.
  • Therefore, the supply increases as prices increase and decreases as prices decrease.
  • Producers will try to increase production as a way of increasing revenues and profits.

Law of Demand

  • Buyers will buy more of a product or service at a lower price than at a higher price, if other things remain constant.
  • At a lower price, more buyers can afford to buy more goods and services and more frequently than they will at a higher price.
  • At lower prices, buyers tend to buy some goods and services as a substitute for other goods and services that are more expensive.

Equilibrium and Disequilibrium

  • When the supply equals demand or when demand equals supply, it is said that the economy is in equilibrium.
  • It is an ideal situation but may not remain for a longer period in actual practice.
  • In actual real life situations, the prices of goods and services constantly change in relation to fluctuations in demand and supply.
  • Under the equilibrium situation, suppliers sell all the goods and serviced produced/offered by them at the given price and buyers get all the goods and services desired by them at that given price.
  • If the price is set too high (above equilibrium point price), excess supply will take place within the economy since the suppliers will produce/offer more goods and services with hope to sell to increase profits but the buyers will find the products/services less attractive and buy less because the price is too high. Unless the price drops down approximately to its equilibrium point price, the demand will not pick up.
  • If the price is set too low (below equilibrium point price), excess demand will take place within the economy since the buyers will find it attractive to buy more goods/services at lower price but the suppliers may not produce/offer enough goods/services because of lower price (and lower profit). However, since the demand is now more than the supply, the buyers have to compete with each other to buy the goods/services at this lower price, the increased demand will push the price up, motivating suppliers to want to supply more. That will bring the price closer to its equilibrium.

  • Movement is said to have taken place when a change in demand is caused only by a change in price and vice versa.
  • Also, movement is said to have taken place when a change in supply is caused only by a change in price, and vice versa.


  • Shift is said to have taken place when demand or supply changes even though price remains the same.
  • Shift in the demand or supply imply that the original demand or suply has been affected by a factor other than price. Price remains the same though either demand or supply has changed. Otherwise as we know, with change in demand or supply, the price changes and vice versa (see explanation of term "movement" given earlier).
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