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Law of Demand and Supply

Law of Demand, Law of Supply, Market Equilibrium
by

Fila Dagomo

on 31 July 2014

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Transcript of Law of Demand and Supply

Law of Demand and Supply and Market Equilibrium
Law of Demand
-states that as the price of commodity decreases,
ceteris paribus
, and the quantity of the product that buyers would be able and willing to buy increases. Thus, the quantity demanded will change as price changes, and in the
opposite direction.
Why should the relationship between quantity demanded and price be inverse?
The satisfaction that we derive out of the last good diminishes as we consume more of it, we would be willing to pay the highest price for the
first try
of the goods or services. The price we are willing to pay
become less and less
as we buy more of the goods.
continued...
The other reason why the demand for a commodity increases as its price goes down:
we tend to cut back on our consumption of a good as its price escalates
,
but we can afford to buy more of it if its price declines
.
continued...
Substitution Effect
Demand Curve
Law of Supply
-States that as the price of a commodity is raised, the quantity of the product that sellers (or producers, firms) are able and willing to sell also increases, all other things being constant or ceteris paribus.


Quantity supplied
refers to the number of units offered for sale within a given period.

Firms are said to be able and willing to supply a certain commodity as long as the price at which they sell it would be sufficient to cover their costs incurred in production and, ordinarily, profits as well.
Relationship between price and quantity supplied
price
quantity demanded
price
quantity demanded
Law of Diminishing Marginal Utility
The Income Effect
When you see a really tasty looking burger but see the price...
Another explanation is that when the price of a product increases, we would tend to buy its substitute (a product similar to it).
$ $ $ $ $
$ $ $
P
Qd
pt. A
pt. B
pt. C
Price
Quantity demanded
Movement Along the Curve
For as long as there is no change in the relationship between price and quantity demanded,
any change in the quantity demanded will be the result of a change in price
. The changes in the quantity demanded are simply movements along the curve or schedule if the price-quantity demanded relationship is unchanged.
What are the other things being referred to?
1.
Wealth
(+)
2.
Income
(+)
3.
Population
(?)
4.
Prices of substitutes
(-)
5.
Prices of compliments
(?)
6.
Consumer tastes and preferences
(?)
7.
Quality of the good
(?)
8.
Advertising and promotions
(?)
9.
Expectations of future price increases
(?)

Non-price factors that affect the quantity demanded.
For sure, still other factors could affect demand, although these are the most common.
price
quantity supplied
price
quantity supplied
As the price goes up, a producer makes more money per product. Since it becomes more and more profitable to produce, they will tend to shift part of their production to that certain product.
The glitter of higher profits induces firms to supply more
.

In a more realistic situation,
for firms to make profits
, they have to charge even higher. And maybe at even higher outputs and all other costs, point to increasing marginal costs. If they are to cover at least these, again, they have to raise the price. Thus, they will only supply more if the price is higher, looking at it from the cost side.

Another possible explanation: as we have seen profits rising with prices,
other manufacturers may join the fray as well
, producing imitations, even though this is illegal. This would also increase the quantity of supply as well.

Supply Curve
P
Qs
Price
Quantity Supplied
Movement along the curve
Any change in price will result in a change in quantity supplied. Thus, an increase in the price is accompanied by an increase in the quantity supplied.
Thus, a movement along the same supply curve is referred to as a change in quantity supplied which is caused by a change in the price.
Change or Shift in the Supply Curve
Other non-price factors that affect quantity supplied are the following:

1.
Changes in producer’s profit goals
2.
Changes in prices of competing commodities
3.
Changes in technology/productivity
4.
Changes in the prices of production inputs

EQUILIBRIUM
At any price,
except one
, the amounts that buyers are willing to buy and the amounts that sellers are willing to sell are unequal. Therefore, at all prices except one, some will be dissatisfied, i.e.; some of the buyers will not be able to buy the number of units that they want, or some sellers will not be able to sell some units of their stock that they want to sell. Only at a certain price is there satisfaction on the part of all, since there is “
equilibrium
” between buyers and sellers.
P
Qd
Qs
S
D
Price
Quantity demanded and supplied
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