Demand is defined as the amount of goods and services that buyers need in the market. The law of demand states that the higher the price of goods or services in the market the lower the demand when all factors are kept constant. Under natural condition, buyers will buy that product whose price will not force them to forgo another more valuable product. The interaction of price and demand is called demand relationship In graph above represents of the quantity demanded at certain prices at any given moment. Take for instance Quantity (Q1) is demanded at price (P1).
Consider points C, D, and E on the demand curve. At C, the price is high and the commodity demanded is low while the reverse is the case at point E. Supply is defined as the amount of good and services that sellers can present to the market for sale. The law of supply states that the higher the price of a commodity at the market the higher the supply of then same product all factors held constant. Producers will supply more products if the selling price is high to generate more revenue from the sale. Interaction between supply and price is called supply relationship.
In the supply curve above when the commodity is sold at a lower price the supplier supplies less. See P1, S1 and P3, S3. Supply curve is upward sloping. Cause of a Movement along a curve- in terms of demand and supply movement is defined as an adjustment along a demand or supply curve. Movement along a demand curve signifies a change is both the price and demand of product or service in the market. A movement in demand curve results from change in price. Movement along a supply curve results from the interaction between price and quantity supplied.
Movement of along the curve will only occur if a change occurs in relation to the original conditions of the supply curve relationship. The combined diagram of demand and supply movement is shown below. Arrow K is movement along demand curve from point C to D due to a change in price. In addition, arrow S is movement along supply curve from point A to point B due to a change in price. Causes of a Shift of both the demand and supply curves- a shift in demand or supply curve is the movement upwards or downwards in the position of the curve due to change in the supply or demand despite unchanged prices.
A shift in demand curve results from external factors other than price changes. These factors may be change in income of the people, tastes and preference, price of related goods and services. A shift in supply curve results from other factors other than price. Supply shift may result from changes in technology and price exemptions. The arrows on the diagram above show shift of demand and supply from the original relationship to a new level indicated by curves D2 D4 and S2S4 respectively. Demand shift from point D1 to D2 and D3 of D4 respectively while the price is kept constant in both situations.
Similarly the supply curve has shifted from point S1 to S2 and from S3 to S4 as the price remains constant for both cases. Therefore the supply shift results from factors other than price changes, (Ben T. & Lai C. L. , 2003). Equilibrium is defined as an economic situation that prevails so that every individual in the market is satisfied with current selling price for a good. The relationship between demand and supply where buyers and sellers are happy with a certain price for particular community is called the equilibrium.
Demand and supply curve intersect; quantity demanded equals to quantity supplied for price. Cause of a Surplus- surplus is excess supply which results from too high prices for the commodity in which case suppliers may lower the prices to encourage the consumption of excess product. Cause of a Shortage – shortage results when buyer are unable to buy to their capacity at a certain price in which case seller may react by supplying more of the product to satisfy the buyers need.
Floor price is defines as a price control form in which buyers have a minimum fixed price for which they are expected to pay for a certain good or service. Ceiling price is defined as price control form in which sellers have a maximum fixed price allowed to charge on goods or services. References Ben T. & Lai C. L. , 2003. The Power of supply and Demand: Thanking tools and Case Study for Students and Professionals. Hong Kong: Hong Kong University Press.