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Demand And Supply - Explanation




Explanation Text

Demand and Supply
The Theory of Economic

Supply and demand is perhaps one of the most fundamental concepts of
economics and it is the backbone of a market economy. Demand is the desire,
willingness, and ability to buy a good or service. The quantity demanded is the specific
amount of that product that buyers are willing to buy at a given price. Supply is defined
as the total quantity of a product or service that the marketplace can offer. The quantity
supplied is the amount of a product/service that suppliers are willing to supply at a
given price. The relationship between price and quantity demanded/ supply is known
as the demand/ supply relationship. In market economy theories, demand and supply
theory will allocate resources in the most efficient way possible. How the process of
market economy mechanism which influence by the demand and supply ?
First of all, we should understand the concept of supply and demand. It’s mean
we have to know the definition and law of demand/ supply. The law of demand says : “If
price increases, the demand for goods or services will decrease. On the contrary, when
price decreases, the demand for goods or services will increase, ceteris paribus.” (Ceteris
paribus means that “other things the same” or “all other things being equal or held
constant.”). For example, at price P1, the quanity of that good demanded is Q1. If the
price of this good were to be decreased to P2, the quantity of that good demanded
would increase to Q2. The same is true for P3 and Q3. When prices move up or down
(assuming all else is constant), the quantity demanded will move up or down the
demand curve and define the new quantity demanded. The demand curve has a
downward slope.
Next, the Law of Supply says : “if the price of goods or services increases, the
quantity of goods or services supplied also increase. On the contrary, if the price of goods
or services decreases, the quantity goods or services supplied also decreases, ceteris
paribus.” For example, the price shifts from P1 to P2, the quantity supplied of that good

shifts from Q1 to Q2. The movement in price (up or down) causes movement along the
supply curve and the quantity demanded will change accordingly. The supply curve has
a upward slope.
Further, for economics, the "movements" and "shifts" in relation to the supply
and demand curves represent very different market phenomena. A movement refers to
a change along a curve. In other words, a movement occurs when a change in the
quantity demanded is caused only by a change in price. A shift in a demand or supply
curve occurs when a good's quantity demanded or supplied changes even though price
remains the same. Shifts in the demand or supply curve imply that the original demand
or supply relationship has changed, meaning that quantity demand or supply is affected
by a factor other than price. Demand : Price of substitutive and complementary goods,
Level of Income, Population, People’s taste and People prediction. Supply : Production
cost, Number of producers, Price of other goods and services, and Natural disasters
When supply and demand are equal (when the supply function and demand
function intersect) the economy is said to be at equilibrium. At this point, the allocation
of goods is at its most efficient because the amount of goods being supplied is exactly
the same as the amount of goods being demanded.
Finally, supply and demand are two very strong market concepts. Studying the
two of them can give us a good idea of what people like to buy and sell. And we can track
both supply and demand by comparing the price of an item over time.