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The Role of Prices: The Forces of Supply and Demand

Categories: DemandEconomicsPrice

Supply and Demand

In microeconomics, according to (Wikipedia), Alfred Marshall defines supply and demand as an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for the good. In my own understanding, it is that kind of relationship between the supplier and the consumer. But in 1776, Adam Smith, known as the Father of economics popularized that supply and demand are really an economic theory. The principles of supply and demand have been shown to be very effective in predicting market behavior.

Supply is how much of an item that is available while Demand is how much of an item that is wanted. In other words, the higher the demand, the higher the price while the higher the supply, the lower the price. T. Locke addressed the concept of supply and demand as part of a discussion about interest rate in 17th-century England. I am 99% satisfied with these incredible explanation base on all the research I made.

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However, there are multiple other factors that affect markets on both a microeconomic and a macroeconomic level. Supply and demand heavily guide market behavior but does not outright determine it. Another way of looking at the laws of supply and demand is by considering them a guides. While they are only two factors influencing market conditions, they are very important factors. Smith referred to them as the invisible hand that guides a free market. However, if the economic environment is not a free market, supply and demand are not nearly as influential.

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Graphical representations although it is normal to regard the quantity demanded and the quantity supplied as functions of the price of the goods, the standard graphical representation, usually attributed to (Alfred Marshall), has a price on the vertical axis and quantity on the horizontal axis. Since determinants of supply and demand other than the price of the goods in question are not represented in the supply-demand diagram, changes in the values of these variables are represented by moving the supply and demand curves (often described as “shifts” in the curves). By contrast, responses to changes in the price of the goods are represented as movement along unchanged supply and demand curves. a table that shows the relationship between the price of a good and the quantity supplied. Under the assumption of perfect competition, supply is the unit of output that is less than the price they would receive.

Economists distinguish between the supply curve of an individual firm and the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. Thus, in the graph of the supply curve, individual firms’ supply curves are added horizontally to obtain the market supply curve. Economists also distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: the availability of one or more fixed inputs typically physical capital), and the number of firms in the industry. In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long-run potential competitors can enter or exit the industry in response to market conditions. For these reasons, long-run market supply curves are generally flatter than their short-run counterparts.

Let take a glance at Production costs, (which is another aspect that determines supply) how much goods costs to be produced. Production of the inputs; primarily labor, capital, energy, and materials. They depend on the technology used in production, and/or technological advances.

Demand schedule

A demand schedule, depicted graphically as the demand curve, represents the amount of some goods that buyers are willing and able to purchase at various prices, assuming all determinants of demand other than the price of the good in question, such as income, tastes, and preferences, the price of the substitute goods and the price of goods, remain the same. we the consumers will buy more of the good. At this point, we are satisfied with the price while the sellers are also satisfied as well. Below, I will be taking on the point of satisfaction between us (the buyer) the seller.

By its very nature, conceptualizing a demand curve requires that the purchaser be a perfect competitor that is, that the purchaser has no influence over the market price. This is true because each point on the demand curve is the answer to the question “If we, the buyer is faced with this potential price, how much of the product will we purchase?” If we have market power, so it’s the decision of how much to buy influences the market price, then we are not ” faced with” any price, and the question is meaningless.

Like with supply curves, economists distinguish between the demand curve of an individual and the market demand curve. The market demand curve is obtained by summing the quantities demanded by all consumers at each potential price. Thus, in the graph of the demand curve

Individuals’ demand curves are added horizontally to obtain the market demand curve.

Microeconomics

Equilibrium

Generally, an equilibrium is defined to be the price-quantity pair where the quantity demanded is equal to the quantity supplied. It is represented by the intersection of the demand and supply curves. According to Merriam-Webster, equilibrium is a state of intellectual or emotional balance. The analysis of various equilibria is a fundamental aspect of microeconomics:

Changes in market equilibrium: Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity, represented as shifts in the respective curves.

Conclusion

In this paper, the supply and demand of a commodity are so much determined by many factors. Technology affects supply and demand at the same time. As technology advances, most individuals demand more goods and services in the market. In this paper, I discovered that the future expectations of price change of some goods and services in the market also affect the demand of consumers. Supply and demand together determine market equilibrium. On a graph, market equilibrium is the point where the supply and demand curves intersect. The price at this intersection is the equilibrium price.

Works cite

  1. Definition and explanation on supply and demand

    https://www.investopedia.com/demand_and_supply

  2. Graphical illustration and explanation and definition

    https://www.en.wikipedia.wiki/supplyanddemand

  3. Consequences of the Lowering of Interest and the Raising of the Value of Money.

    https://political-economy.com/john-locke

  4. Definition of equilibrium by Merriam-Webster

    https://www.merriam-webster.com/dictionary/equilibrium

  5. Supply and demand definition and explanation & graph

    https://www.britannica.com/topic/supply-and-demand

  6. Intro to supply and demand

    https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp

Cite this page

The Role of Prices: The Forces of Supply and Demand. (2020, Oct 23). Retrieved from http://studymoose.com/the-role-of-prices-the-forces-of-supply-and-demand-essay

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