Demand- Supply Maintaining the Economics System

In microeconomics, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers, resulting in an economic equilibrium for price and quantity.

The four basic laws of supply and demand are:

1.     If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.

2.     If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.

3.     If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.

4.     If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.

In economics, supply is the amounts of some product producers are willing and able to sell at a given price all other factors being held constant. Demand is the desire to own anything, the ability to pay for it, and the willingness to pay. Price and demand almost always have an inverse relationship. As the price of a good goes up, the demand goes down. There are many factors other than price that influence demand. Some examples are tastes and preferences, disposable income, and the price of relate goods.

Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

 

Equilibrium: Where Supply Meets Demand

Equilibrium is the point where the quantity demanded equals the quantity supplied. This means that there's no surplus of goods and no shortage of goods. A shortage occurs when demand is greater than supply; in other words, when the price is too low. A surplus occurs when the price is too high, and therefore consumers don't want to buy the product.

For example, at 70Rs. per liter, consumer demand exceeds supply, and there's a shortage of petrol in the market. Shortages tend to drive up the price, because consumers compete to purchase the product. However, when prices go up too much, demand decreases, even though the supply may be available. Consumers may start to purchase substitute products, or they simply may not purchase anything. This creates a surplus. To eliminate the surplus, the price goes down and consumers start buying again. In this manner, equilibrium is usually maintained quite efficiently.

Difference between Microeconomics and Macroeconomics

Macroeconomics comes from the Greek word makro- meaning “large.” It is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies. With microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP (Gross Domestic Product), unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behaviour determines prices and quantities in specific markets.

Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from, for example.

Microeconomics comes from Greek word mikro- meaning ‘small.’ It is a branch of economics that studies the behaviour of individual households and firms in making decisions on the allocation of limited resources.Typically, it applies to markets where goods or services are bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.

This is in contrast to macroeconomics, which involves the ‘sum total of economic activity, dealing with the issues of growth, inflation, and unemployment.’  

Microeconomics is generally the study of individuals and business decisions; macroeconomics looks at higher up country and government decisions. Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize its production and capacity so it could lower prices and better compete in its industry.   For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.

While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public.

The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained.