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.
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