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SUPPLY AND DEMAND

Supply and demand relate implicitly to the production and consumption of a market. 
Demand refers to how much (quantity) of a product or service is desired by buyers. The demanded quantity is the amount of a specific product that people are willing to buy at a given price. The relationship between the price and the demanded quantity is known as the law of demand.

The law of demand

The law of demand states that, if all other factors remain equal, when the price of a product(good) increases, the demanded quantity decreases or, conversely, if the price of a good decreases, demand increases. It describes an inverse relationship between the price and the quantity demanded. 




Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The relationship between the price and the supplied quantity is known as the law of supply.


The law of supply

The law of supply states that, if all other factors remain equal, when the price increases, the quantity supplied increases as well. In other words, it describes a direct relationship between the price and the quantity supplied.

Given the problem of scarcity, given that human wants exceed what can actually be produced, potential demands will exceed potential supplies. Society therefore has to find some way of dealing with this problem, to try to match demand with supply. 
This applies at the level of the economy overall: aggregate demand will need to be balanced against aggregate supply. In other words, total spending in the economy should balance total production. It also applies at the level of individual goods and services.  But if potential demand exceeds potential supply, how are actual demand and supply to be made equal? Either demand has to be curtailed, or supply has to be increased, or a combination of the two. 

Economics studies this process. It studies how demand adjusts to available supplies, and how supply adjusts to consumer demands.

Supply and demand relationship

Although potential demands will exceed potential supplies, actual might be greater than actual supplies. But it can work the other way around as well, actual supply being greater than actual demands. This might happen due to lack of information about the market and/or demand by the suppliers. The supply and demand relationship shows how supply and demand level out when there is a major difference in the quantity demanded and the quantity supplied. For ease of understanding the concept, we will illustrate this through an example:

Suppose that a company sells computers at £200 each. Because previous reports and analysis show that people will not demand computers above £200 and taking account of the potential revenue(by assessing the potential demand), the company won't be able to produce more than 10 computers(because in order to produce more they would need to charge a higher price but they have the uncertainty that people will buy computers over £200).
If however the 10 computers are demanded by 20 people(demand is greater than supply) the price will subsequently rise. The rise in price should prompt more computers to be supplied(as the supply relationship shows the higher the price the greater quantity supplied).

If however there are 30 computers and the demand is at 20(supply greater than demand) the price will stay the same until the 20 customers have been satisfied with their purchases and subsequently the price will fall, in an attempt to sell the rest of the computers. The lower price will increase demand and might attract other customers that thought the initial price was too high.

 Thus we can state that the quantity demanded usually decreases when the price increases and the quantity supplied decreases when the price falls. The reason for these phenomena is that when customers are buying at a higher price, they might give up on other products that might be cheaper thus more profitable for them and when producers sell at a lower price they might lose out on a much more profitable product that they could produce for the same amount of money and sell for a greater amount. This benefits that people give up on when they choose a certain course of action is called opportunity cost. We will talk more about it in the next post.


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