Supply and Demand: Basic Economic Concepts
Supply
Definitions:
- The amount of goods or services that producers are willing to offer at different prices and conditions at a certain time.
- The amount of products and services available for consumption.
Elasticity:
Elasticity is expressed graphically by means of the supply curve. The slope of this curve determines how the supply increases or decreases with a decrease or increase in the price of the property. This is the elasticity of the supply curve (Eo = Inc.Q / Q : Inc.P / P).
Direct Contact:
The law of supply states that, with an increase in the price of goods, the quantity supplied of that good will be higher; i.e., producers of goods and services will have a greater incentive.
Waveshape:
The offer is the relationship between the quantity of goods offered by the producers and the current market price. Graphically, it is represented by the supply curve. Because the supply is directly proportional to the price, supply curves are almost always growing. In addition, the slope of a supply curve also tends to be increasing, due to the law of diminishing returns.
Non-Increasing Sloping Supply Curves
An example is the supply curve of the labor market. Generally, when a worker’s wage increases, he is prepared to offer a greater number of hours of work because higher wages increase the marginal utility of work (and increase the opportunity cost of not working). But if this remuneration is too high, the worker may experience the law of diminishing returns in relation to their pay. The large amount of money he is earning will not raise another little value for him. Therefore, beyond a certain point, he will work less as wages increase, deciding to spend his time in leisure.
This type of supply curve has been observed in other markets, such as oil. After record prices caused by the 1973 crisis, many oil-exporting countries decreased their production.
Curve Offers of Utility Companies
Another example of atypical supply curves is found in the utilities. Because a lot of costs are fixed costs, the marginal cost of these enterprises is nearly constant, so that its supply curve is a straight increase.
Determinants of Supply
- The price of the product: A higher price, higher offer.
- Costs of production factors: A reduced supply costs.
- Market size: A largest market, a greater supply.
- Availability of factors of production: A greater availability, increased offer.
- Number of competing companies: Increased competition, greater supply.
- Quantity of goods produced: A much greater supply.
Demand
Definition:
The amount of goods or services that consumers are willing to buy at different prices and conditions, at one point.
Factors Determining the Demand for a Good
- Price thereof: A greater demand, lower prices.
- The price of other goods:
- Substitutes: If the goods are substitutes, at higher prices in one, greater demand for the other (butter – margarine).
- Complementary: If the goods are complements, at a higher price of one, lower demand from other (fuel – car).
- The consumer’s personal income: Increased income, a greater demand.
- Preferences or tastes of individuals: If a site becomes popular, more frequent services.
- Increasing population demanding the right: A larger, older population, greater demand.
- Changes in the outlook for future prices: If you think prices will go up, you buy, and if you think that will go down, wait to be smaller.
Displacements Along the Demand Curve
The displacements along the demand curve express the change in the quantity demanded by the price effect.
Shifts in the Demand Curve
When the demand curve shifts to the right, it explains an increase in demand due to changes in other factors other than its own price, and when the curve shifts to the left, it shows a drop in demand also due to the variation of another factor other than price.
Demand Curve Price
The price demand curve usually has a downward trend that shows how, as the price rises, the consumption of the product is declining. Exceptionally, there are some goods, called Giffen goods, for which the demand curve price is not decreasing. For example, by increasing the price of basic foods, consumers cannot afford to buy other types of food, so they have to increase their consumption of basic foods.