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Economic Basics: Supply And Demand

Economic Basics: Supply And Demand

 
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Author: Matt Johnson
Objective:

Define the basic principles of the two most important laws in economics; the law of supply and the law of demand.

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Tutorial

Supply And Demand, Definitions.

In the context of supply and demand discussions, demand refers to the quantity of a good that is desired by buyers. An important distinction to make is the difference between demand and the quantitiy demanded. The quantity demanded refers to the specific amount of that product that buyers are willing to buy at a given price. This relationship between price and the quantity of product demanded at that price is defined as the demand relationship.

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. This relationship between price and the ammount of a good/service supplied is known as the supply relationship.

When thinking about demand and supply together, the supply relationship and demand relationship basically mirror eachother at equilibrium. At equilibrium, the quantity supplied and quantity demanded intersect and are equal.

In the diagram below, supply is illustrated by the upward sloping blue line and demand is illustrated by the downward sloping green line. At a price of P* and a quantity of Q*, the quantity demanded and the supply demanded intersect at the Equilibirum Price. At equilibrium price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. This is the optimal economic condition, where both consumers and producers of goods and services are satisfied.

The Law Of Demand

Very simply, the law of demand states that if all other factors remain constant, if a good's price is higher, fewer people will demand it. As the price of that good goes down, the quantity of that good that the market will demand will increase. In the diagram below, you see this relationship. 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 Law Of Supply

After understanding the law of demand, the law of supply is simple, it's effectively the inverse of the law of demand. The law of supply states that as the price rises for a given product/service, suppliers are willing to supply more. Selling more goods/services at a higher price means more revenue. In the diagram below, you can see that as 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.

Questions and Answers

  • Answer 1
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    Ancia Ricketts 15 days ago

    Explain and show graphically (in separate graphs) when the price of compact disc players decreases, the demand for compact discs rises while the demand for cassette tapes decreases.

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      Kofi Sarpong answered 14 days ago

      The relationship between the demand for compact disc and the demand for cassette tapes is a competitive relationship. This means that one commodity say compact disc can be used perfectly for the same purpose as cassette tapes. Thus if the price of compact disc rises "all other things being equal"demand for such commodity will fall since a rational consumer aims at cheaper prices of products to satisfy his/her desires,hence consumers will opt for cassette tapes since it has a cheaper price and also serves the same purpose causing the demand curve of cassette tape to increase. The reverse is true.
      Sarpong Kofi Mfantsipim school-Ghana

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  • Answers 0
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    MAY THEOBALD about 1 month ago

    function of demand and supply

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  • Answer 1
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    Ruth Ziadzi 2 months ago

    How can i differenciate between the various curves.can u give me a guide line

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      Paul Hannan answered 2 months ago

      Do you mean when there are multiple supply or demand curves on one graph? Generally there will be a D1 D2 or S1 S2 by the curves. The 1 refers to how it started and 2 refers to where/what changed (there might also be arrows pointing to the new curve.

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  • Answer 1
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    Tammi Kim 4 months ago

    Hello,

    I've been having trouble understanding how to graph this specific problem and showing the labor markets (assumed to be competitive and initially in equilibrium) is affected by the change described.

    a. Labor market for university professors.
    Change: College enrollments expand.

    Thank you in advance for your help.

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      Paul Hannan answered 4 months ago

      I always like to outline what each line means first to help with the graphing. So if I understand your comment D= demand for profs and S= # of profs . So if college enrollment increases we are going to see an increase in D (more teachers needed to teach the extra students). So which way would the demand curve shift?

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    Thirusha Moonsamy 7 months ago

    Why in certain graphs Q3 is in the middle and Q1 and Q2 changes on either side in different scenarios.

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      Paul Hannan answered 7 months ago

      Can you show me an example of what you are referring to?

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    Paul Hannan 8 months ago

    If you would like to see some video tutorials to expand and explain these principles of economics check out this pathway of tutorials: http://www.sophia.org/examine-the-principles-of-market-efficiency-pathway

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    jamal ismail 8 months ago

    what is the demand curve

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      Paul Hannan answered 8 months ago

      Think about it as a graphical way to represent the law of demand. Its relative slope (slanted down to the right) is because of a negative relationship between the market price of a good/service and the quantity that consumers are willing and able to buy—the higher the price, the less that will be demanded and vice-versa.

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    EBIKA WILBERFORCE 8 months ago

    what is the effect on new cars if the price of petrol reduce

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      Paul Hannan answered 8 months ago

      Depends on some more details from the scenario but you'd most likely see an increase in demand also known as a shift of the demand curve (to the right). This shift is happening because the price of a complement product has gone down. Think about it as people have more money to spend on a car because they have to spend less on gas. Does that help?

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    EBIKA WILBERFORCE 8 months ago

    what causes price of petrol to decrease?

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  • Answer 1
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    ALFRED HU 8 months ago

    So say we have two products, Toshiba HD DVD players and Sony Blue Ray Players. if toshiba stops producing DVD players, how does it influence the price of both product, and how would this impact on DVD and Blue ray Movies?

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      Paul Hannan answered 8 months ago

      Well assuming that they are substitute products (because people generally choose one or the other to watch HD movies) you'd see an increase in demand for the blue ray player. Basically consumers have fewer options to watch HD movies so more are going to turn to the blue ray player. As a result, you’d see an increase in price for the Sony players (less options people would be willing to pay more). If I understand the question right there is no impact on HD DVD because they have already stopped being produced.

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