supply and demand essay

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• Introduction

Demand curve

Supply curve.

• Market equilibrium, or balance between supply and demand

supply and demand

supply and demand , in economics , relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. It is the main model of price determination used in economic theory. The price of a commodity is determined by the interaction of supply and demand in a market . The resulting price is referred to as the equilibrium price and represents an agreement between producers and consumers of the good. In equilibrium the quantity of a good supplied by producers equals the quantity demanded by consumers.

The quantity of a commodity demanded depends on the price of that commodity and potentially on many other factors, such as the prices of other commodities, the incomes and preferences of consumers, and seasonal effects. In basic economic analysis, all factors except the price of the commodity are often held constant; the analysis then involves examining the relationship between various price levels and the maximum quantity that would potentially be purchased by consumers at each of those prices. The price-quantity combinations may be plotted on a curve, known as a demand curve , with price represented on the vertical axis and quantity represented on the horizontal axis. A demand curve is almost always downward-sloping, reflecting the willingness of consumers to purchase more of the commodity at lower price levels. Any change in non-price factors would cause a shift in the demand curve, whereas changes in the price of the commodity can be traced along a fixed demand curve.

The quantity of a commodity that is supplied in the market depends not only on the price obtainable for the commodity but also on potentially many other factors, such as the prices of substitute products, the production technology, and the availability and cost of labour and other factors of production . In basic economic analysis, analyzing supply involves looking at the relationship between various prices and the quantity potentially offered by producers at each price, again holding constant all other factors that could influence the price. Those price-quantity combinations may be plotted on a curve, known as a supply curve , with price represented on the vertical axis and quantity represented on the horizontal axis. A supply curve is usually upward-sloping, reflecting the willingness of producers to sell more of the commodity they produce in a market with higher prices. Any change in non-price factors would cause a shift in the supply curve, whereas changes in the price of the commodity can be traced along a fixed supply curve.

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Unit 2: Supply, demand, and market equilibrium

About this unit.

Economists define a market as any interaction between a buyer and a seller. How do economists study markets, and how is a market influenced by changes to the supply of goods that are available, or to changes in the demand that buyers have for certain types of goods?

• Law of demand (Opens a modal)
• Market demand as the sum of individual demand (Opens a modal)
• Substitution and income effects and the law of demand (Opens a modal)
• Price of related products and demand (Opens a modal)
• Change in expected future prices and demand (Opens a modal)
• Changes in income, population, or preferences (Opens a modal)
• Normal and inferior goods (Opens a modal)
• Inferior goods clarification (Opens a modal)
• What factors change demand? (Opens a modal)
• Lesson summary: Demand and the determinants of demand (Opens a modal)
• Demand and the law of demand Get 5 of 7 questions to level up!
• Law of supply (Opens a modal)
• Change in supply versus change in quantity supplied (Opens a modal)
• Factors affecting supply (Opens a modal)
• What factors change supply? (Opens a modal)
• Lesson summary: Supply and its determinants (Opens a modal)
• Supply and the law of supply Get 3 of 4 questions to level up!

Market equilibrium and changes in equilibrium

• Market equilibrium (Opens a modal)
• Changes in market equilibrium (Opens a modal)
• Changes in equilibrium price and quantity when supply and demand change (Opens a modal)
• Changes in equilibrium price and quantity: the four-step process (Opens a modal)
• Lesson summary: Market equilibrium, disequilibrium, and changes in equilibrium (Opens a modal)
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Home — Essay Samples — Economics — Supply and Demand — Understanding Supply and Demand Dynamics

Understanding Supply and Demand Dynamics

• Categories: Supply and Demand

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Words: 590 |

Published: Jan 30, 2024

Words: 590 | Page: 1 | 3 min read

Table of contents

Equilibrium, market dynamics and price changes, government interventions.

• Blanchard, Olivier and Jordi Gal"The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so Different from the 1970s?" in NBER Macroeconomics Annual, Volume 23. 2008.
• Mankiw, N.G. Principles of Economics, 8th ed., Cengage Learning, 2017.
• McConnell, Campbell and Stanley Brue. Economics: Principles, Problems, and Policies, 21st ed., McGraw-Hill Education, 2018.

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Supply and Demand, Essay Example

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The everyday occurrence of buying a new car has profound lessons for the discipline of economics.  On the demand side, there are numerous factors that affect purchasing a new car.  For example, demand for cars might be influenced by changes in prices of substitutes: If the price for public transportation (whether for train, bus, or subway) or motorcycles decreases dramatically might lead to less demand for cars (Mankiw, 2001). That is because consumers can pay less money and still receive similar benefits.  Another key demand side factor is interest rates charged on car loans or the availability of credit.  Since a majority of cars are bought on credit, a reduction in interest rates would lower the cost of financing (and ultimately the car) making cars more attractive to consumers. By the same token, if the standards for credit availability were lowered, this might also lead to greater demand for cars.  A contraction in credit or higher interest rates would likely lead to a contraction in demand as the price of the car increases. Third, changes in advertising or fashion can affect demand via an individual’s preferences vis-à-vis car purchase.  For example, many car makers are making more energy efficient cars that have less of an impact on the environment.  Consumers that normally wouldn’t buy cars, or may consider other substitutes, may purchase cars deemed “environmentally friendly.” Or perhaps advertising that stresses cars made in the United States has a palpable impact on consumers and increases individual demand by moving the demand curve.  Lastly, consumer sentiment plays a key role in shaping demand for automobiles: During the depths of the global recession, demand for cars plummeted as consumer sentiment over the future, including the ability to make car payments, deteriorated. As the economy and consumer sentiment gradually improved, so did the market for automobiles.

There are three main factors related to the supply of cars (Baumol& Blinder, 2004).  The first factor is the price of inputs used in building cars.   Cars are composed of many parts that vary in price over time. If the prices of inputs increase, the manufacturer has to decide whether to raise the price of the car which may lead to decreased supply.  On the other hand, if there is a significant decrease in the price of inputs, the car manufacturer might be willing to supply more cars.  The second main factor in deciding supply is the market structure of the car industry.  Traditionally, the car industry is extremely competitive, particularly after car manufacturers from India and China have now started to export cars.  With an increase in the number of manufacturers, and arguably competitiveness in the car industry, manufacturers may choose to reduce supply in order to avoid the situation of unsold cars. On the other hand, if  there is an overall decrease in the number of manufacturers, other manufacturers may choose to increase supply to make up for lost production in the market.  The last main factor is the producer’s expectation in the production of cars.  For example, a producer may look at factors such as consumer demand and price in order to decide how many cars to supply in the market.  Future expectations are very important as car manufacturers typically make production decisions 1-2 years in the future based on existing trends.

Demand and supply for cars may also have an impact on complementary goods such as GPS tracking systems.  GPS systems are a complementary good because car manufacturers or consumers who purchase cars also purchase GPS systems.  Another complementary good for cars is gasoline.  Gasoline must be purchased in order for a car to properly operate.  Higher prices for cars may have an adverse impact on the quantity of gas purchased, especially during times of an economic downturn or high gas prices.  An increase in the price of gas may also influence the quantity and type of car purchased.  Due to the wide range of cars available, price elasticity plays a significant role in the type of car purchased.  For example, due to the segmented nature of the car market, lower-priced cars likely have a higher price elasticity of demand.  For example, if Ford raises prices too high on a lower-end model, consumers will likely simply purchase another type of car.  At the upper end of the car market, however, price elasticity of demand is likely quite low.  That is, if Mercedes raised the price of a car $5,000, it is not clear that a consumer would necessarily purchase a BMW instead.  This is because consumers at higher price levels are less sensitive to changes in price.

Mankiw, G.  (2001). Principles of Economics.   New York: Southwestern Press.

Baumol, W. & Blinder, A. (2004).  Microeconomics Policy.  New York: Southwestern Press.

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Supply and Demand Essay

In economics, the terms “Supply” and “Demand” are of fundamental importance to the discipline because they are the factors that drive all other related activities of the economy. Argumentatively, although the field is broad and these two are like the pillars that hold together everything else in place, the exchange of goods and services from the seller side and the buyer’s side. Simply put, the demand covers the customer side while the supply side covers the seller’s side, who provide the goods or service. So, this, paper will discuss in detail the two terms and extensively cover what they mean in the context of economic transactions and how they relate. Also, the paper will seek to explore the shifts in demand and supply; because they are not static but are subject to changes of either going up or going down- for both depending on various factors that will form part of the subsequent discussions of this paper.

At this point, it is important to note while they are closely related, it is not automatic that an increase will one will cause the same reaction for the other. Each independently responds differently to certain factors. However, in a state of equilibrium, the shifts are similar where if demand, increases the seller responds also by increasing their goods or services(Bas, et al. 4). For each, the discussions will revolve around meaning, application in the real-life, and the relationship with the causal agents that leads to particular changes. The figure below shows the relationship between demand and supply that will guide the subsequent discussions.

Figure 1 Relationship between Demand and Supply

Demand in the field of economics refers to the total amount of goods or services that consumers are able and willing to pay for it when it is at that price. In practice, demand is usually different at each price level which is the main factor that influences the patterns of consumers’ behavior. The price is used as the reference point of explanation because it usually reflects the value of a product and its utility preference to the buyer. In particular, just how much is a customer willing to pay and what amount of the product or service do they want for it at that price is what demand is all about(Bas, et al. 11). In some of the cases, a customer attending a fair on a hot day may be willing to pay more for a glass of lemonade than if they had attended the fair when the weather was cold. So, demand is the total amount of product that a consumer will be expecting in return for money of a certain value.

At different prices, the quantity will change because of the different factors mentioned in the subsequent parts of the paper. From this example, it is clear that the demands thus also exist at different levels; the first is the market demand for the product itself in the economy and the second is the aggregate collective demand of all the products that exist in the market for that economy. In the first level, the focus is the product itself in the context of the consumer, and for the second, it is all the products that are present in that specific jurisdiction. A good example is a demand for a GTI muscle automobile in the US may be 15 % while the demand for all cars in the US is 56%. Therefore, in the first example, the particular product is assessed individually within the context of the market while in the second level it is all products that the same, i.e. cars, that are calculated.

Supply, on the other hand as aforementioned represents the other side of the economic transaction divide, the suppliers. The suppliers’ framework is overly broad and is used to refer to all such factors that are elements of production including labor, money, and companies that collectively produce the goods to the buyer. Supply: therefore, this definition refers to the total amount of goods and services that the supplier is willing to produce and offer to the market at a certain price (Moheb-Alizadeh and Handfield 5). Using the earlier example, now the seller of the lemonade at the fair is willing to make a certain amount of the drink for the market at a particular price. So, for example, if the fair is hosted on a sunny day, the price is higher and thus he or she may be willing to produce more lemonade for the fairgoers. However, on a cold day when the price of the lemonade is lower, he may only be willing to produce a lower amount of lower to reduce. The price is used as the central incentive in an economy that is why in both cases it is the principal elements that are used to define both supply and demand. As stated earlier, the movements are not static but rather shift according to different factors.

The shifts in the demand and supply of the goods and services for a particular product is dependent primarily on the prices of the inputs that are used in the production of the goods and services such as labor, raw materials, tariffs attached to the product and technical resources involved in the production. Similarly, for the demand for a good or service shifts according to the prices set for the product or service (Mankiw 54). When the prices are higher and other factors remain constant regarding the product, the demand reduces and when the prices reduce, the demand increases. From this point of view, it is accurate to hypothesize that demand and supply shifts according to how the prices move when all other factors remain constant.

Works Cited

Bas, M., et al. “From micro to macro: Demand, supply, and heterogeneity in the trade elasticity.”  Journal of International Economics , vol. 108, 2017, pp. 1-19, doi:10.1016/j.jinteco.2017.05.001.

Mankiw, N. G.  Essentials of economics . Cengage Learning, 2020.

Moheb-Alizadeh, H., and R. Handfield. “Developing talent from a supply–demand perspective: An optimization model for managers.”  Logistics , vol. 1, no. 1, 2017, p. 5, doi:10.3390/logistics1010005.

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Free Supply and Demand Essay Sample

The ideas of supply and demand are very essential to finances, as they are the backbone of market economy. Demand is the competence or the enthusiasm of a consumer to buy manufactured goods at a particular price and given time. The total demanded relate to quantity of the good and services the customers are ready to buy.  Demand is recorded on a demand plan, and then plotted on a chart known as a demand curve which goes downwards. The mark stands for the link between cost and the quantity demanded. The quantity demanded is referred to the total of manufactured goods people are ready to buy at a definite price.

This link flanked by price and quantity demanded is called demand relationship. The law of demand states that while all other factors do not change, if a product is sold at a higher price, less people will ask for that commodity, in other terms, the higher the price of a commodity, the lower the amount demanded, and the inferior the price, the higher the quantity demanded. Consumers do not obtain large quantity of products when prices are high. This is because as the price of a product goes up, even the chance of buying the good is up. As a result buyers will naturally avoid buying a commodity that will make them to give up the spending of something else which is more vital.   In standard, each customer has a demand curve for any commodity that he decides to buy. The buyer’s demand curve is equal to the trivial utility curve. After adding up all the buyers’ curves, they end up making the market demand curve for that commodity. 

Supply indicates how much the sellers can offer to their buyers. The quantity supplied refers to the total amount of certain commodities producers are enthusiastic to supply to their consumers at a certain price. The connection between the amount of commodities supplied to the market and the price they are sold at is called supply association. Price is thus a reflection of demand and supply.  The law of supply indicates that the higher the price of a product, the higher the supply, and vice versa. Producers of commodities tend to supply more goods at a higher price because they’ll be selling at a higher profit or increased revenues. Supply involvement is a factor of time unlike the demand relationship.

Time is critical to supply because suppliers must adjust to the situation whenever there is a change in demand and price. For example, if there is increase in the demand and price of umbrellas in an unforeseen rainy season, suppliers may hold demand by using their making equipment more rigorously. However, if there is a climate change during the year, and the umbrellas will be needed, the change in demand and price will stay for long thus the suppliers will have to change their gear and making facilities to meet the lasting level of demand.

Supply and demand have relationship, and affects price in different manners. For example, if a certain item is costing very higher, the demand will decrease, and if the suppliers find an item has a high demand, they will increase its volume of production, and the selling price will go up. However, if demand and supply are equal, they are at equilibrium. Equilibrium refer to the price at which the amount demanded by the buyers and the amount that the firms are capable of supplying goods and services are equal.  In other words, the total commodities supplied is equal to the total commodities demanded therefore every person is satisfied with the recent economic situation. When supply and demand is equal, it is said to be at equilibrium; however, if the supply exceeds demand, demand exceeds supply, or the two are not balanced, there said to be points of disequilibrium.

Without a shift in demand or supply the market price will remain the same. A shift of demand or supply curve occurs when the amount of product’s demanded or supplied changes even though the price remains the same. Shift occurs due to certain factors rather than price. For example, the price of cooking oil is $4 and the amount of a certain type of cooking oil demanded increased from quantity 1 to quantity 2, there will be a shift in the demand for a certain type of cooking oil. Shifts in the demand curve means that the original demand connection has changed; this shows the quantity demanded has been affected by another factor and not the price. A shift in the demand connection would occur, if for instance, suddenly that type of cooking oil is the only type of cooking oil which is available in the market. There are other factors which might lead to a shift in demand curve these may include; if a substitute of a certain product increases its price or a complement of that commodity lowers its price. The consumers may as well want to change their tastes and preferences in favor of the product.

On the other hand, if the price for cooking oil was $4 and the amount supplied went down from Q1 to Q2, then there would be a shift in the supply of cooking oil. This will show that the previous supply has changed. This shows the amount supplied is affected by various factors other than the price. A shift in the supply curve would occur due to; for example, there might be a natural disaster which will cause the shortage of raw materials used to produce cooking oil thus there will be less supply. There other factors which may source a move in the supply arc, and these may include; development in the production technology will lead to high output and competence in the production process thus the supply will increase and lower the cost for businesses. Favorable climate will also lead to higher yields for agricultural commodities. 

Supply and demand is a basic feature in determining the character of the marketplace. This is because it is known to be the main determinant in location up the cost of commodities and services. The availability or the supply of commodities or services is a main indication in knowing the price at which those commodities or services can be obtained. For example, an industry giving some services but has not much competition in the area will be able to control the price than will an industry working in a highly spirited location. Accessibility establishes the pricing structures in the marketplace; however, demand must also be there.

For example, an industry may produce vast number of a product at a low cost, but if there is little or no demand at all for the manufactured goods in the marketplace, the manufacturing will have no alternative but to sell the manufactured goods at a very low price. On the other hand, if the marketplace shows friendly to the manufactured goods that is being sold, the industry can set up a higher cost for the product. This demonstrates that supply and demand are closely entangled economic perceptions. Definitely, this shows how supply and demand is regularly mentioned as among the majority basic in all of economics.

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Supply and demand is a basic feature in determining the character of the marketplace. This is the major determinant in setting up the cost of commodities and services. The law of demand equates extra things, as the price of a commodities rises, its quantity demanded falls.

Demand can be signified as the quantity of a product or service which is required by consumers, while the quantity demanded can be defined as the amount of a manufactured goods customers are willing to buy at a particular price; the two(demand and quantity demanded ) defines a demand relationship.  

Supply is what the market can offer. The quantity supplied is the quantity of goods producers are willing to supply at a particular price. The law of supply states that the higher the price of a commodity, the higher the supply, and vice versa.

Supply and demand have relationship, and affects price in different ways.  However, they are they are believed to be at equilibrium when both demand and supply are equal. However, if the supply exceeds demand, demand exceeds supply, or the two are not balanced, there said to be points of disequilibrium, resulting to shift.

A shift of demand or supply curve occurs when the amount of product’s demanded or supplied changes even though the price remains the same. Shift occurs due to certain factors rather than price. In demand, if a substitute of a certain commodity increases its price or a complement of that commodity lowers its price. The consumers may also want to alter their tastes and preferences in favor of the product. In supply, there other factors which may cause a shift in the supply curve, and these may include; improvement in the production technology will lead to high output thus the supply will increase. Favorable climate will also lead to higher harvest and the supply will be high.

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Introduction: Characteristics of the market economy, such as demand and supply, may be considered on their own, independently from each other only in a theoretical example. In terms of the real economy, they are interconnected through the price mechanism which in turn may have a number of provisions connected. The food crisis speaks true about the fundamental factors that were clearly responsible for keeping the price of cereals at $117 in 2000 and trade factors pushing the prices to $295 per metric ton in 2008. According to some commentators the spike in prices were also due to droughts in grain-producing nations and rising oil prices which in turn escalated the costs of fertilizers and food transportation. Background: First consider the situation: there is a product in the market to which the price is set at a level such that the portion of the product cannot be realized. In the graph shown below, it is a region lying above O point between the curves of supply and demand. In this case, the result of high prices is the formation of an excess of the product or available in oversupply. Such a state cannot exist for a long time, since an excess of goods leads to the need to reduce prices. Equilibrium factors: The following situation: obviously, the high price of goods as a result of competition will inevitably go down, because the price is unsustainable. However, if the price of the product falls too low, there will be a shortage, which will characterized by the excess of demand for the product. It is an area located below O point between the curves of supply and demand shown in the graph below. Now, competition between buyers will raise the price of the product. This price will be increased as long as the market does not have a situation when the quantity of goods which entrepreneurs are willing and able to produce and offer to the market, will be equal to the amount that consumers are willing and able to buy. As a result, there is no shortage or surplus of goods sold at a given price at which equilibrium occurs. The price appears, balancing between supply and demand, which called a market equilibrium price or market clearing price. The establishment of the equilibrium price in a competitive market takes place under the influence of a change in trends in both demand and supply. The equilibrium market price is set as a cash equivalent to supply and demand. It’s equalized by the impact of the competitive market environment. Clarity, market equilibrium can be demonstrated with the help of the graph below. Classical supply and demand graph The demand curve d and the supply curve intersect at point O. The area which lies above O t has a surplus and region lying below O characterized by the deficit of the offered goods. The ability of the competitive forces of supply and demand set the price level at which decisions on the sale and purchase are synchronized, called the balancing function of the prices. Changes in supply and demand to food products is most often associated with the price along with factors such as drought, slowing yield growth, low stocks, macroeconomics imbalances, rising oil prices and export restrictions. In a stable economy the prices at which goods are sold a lot, changed a bit slowly for a long time remaining unchanged. Prices may also change rapidly due to speculations. The Bubble: There were 3 price shocks in the last 15 years in worldwide wheat market. The greatest growth of wheat price observed during 2007-2008 years. 2000-2015 price of wheat chart During the 12 months from March 2007 to February 2008, wheat prices have doubled and exceeded 300 dollars per ton, setting a record in nominal terms. However, historical data show that in real terms the price of wheat may exceed even in normal times such as that happened in 1972 when the Soviet Union imported unexpected quantities due to the devastating result of agricultural policies. The Burst of Bubble: What happened in 2007? There was a combination of discretionary trade and the trade shocks. 1. Rice price started to rise in early 2007 much later than maize prices and just after the first rise in wheat prices. 2. Countries such as Thailand, India and Vietnam which account for sixty percent of global exports introduced restricts on their exports due to overshooting and rapid increases in domestic food prices. 3. These actions pushed the panic button triggering a huge import from the countries such as Philippines, Malaysia and Indonesia. 4. Philippines imported 1.3 mmt of rice in just the first four months of 2008 exceeding their entire import bill of 2007. 5. Malaysia and Indonesia announced they would double or triple government held stocks largely through increased imports. 6. To make the situation critical, India announced it will replace the ban with a minimum export price of $425 per ton which is still around $100 higher than comparable prices in Thailand export market. 7. Saudi import from Thailand rose by nearly 90% after India’s export ban and 2007 December the Saudis subsidize rice imports to the tune of $266 per metric ton. 8. Drought plus high inflation in Iran made it to import 0.8 million metric ton from Thailand. 9. Nigeria waived its 100 percent tariff on rice in early 2008 and procured 0.5 metric ton from Thailand. 10. Another cause for the rise is to be the diversion of food crops (maize) for making biofuels. An estimated 100 million tons of grain per year are being redirected from food to fuel. The increase in demand contributes to the shift of demand curve to the right. Specifically, the amount required to market products of this type at each price level increased. If the market price will remain for some time at the former equilibrium level, there will be a deficit because the amount of the demand increase from q1 to q2, and the supply remains on the same level. 11. 12. Demand shifts to the right Resetting of price in 2008: The panic buying from the countries came to a halt when there were enough indications that there is a record harvest and that supply was unlikely to be a constraint. Oil exporting too understood that prices could not last forever and were reluctant to buy at such inflated prices. The market was further calmed when Japan was permitted to re-export some of its rice stocks. In late May price declined further as trade restrictions eased, other commodities prices fell, and the dollar strengthened. Speculative hoarding that was at play gradually disappeared as speculators realized that prices could not continue to rise. The invisible hand that caused havoc slowly was allowed to take the back seat putting the price mechanism in the front place. Conclusion: The global food crisis rejuvenated the concepts how trade shocks can be devastating despite having a strong economic fundamentals. The practice of discretionary trade still prevails in most of the so-called market economies always keeping the door open for speculations. In the words of President Clinton, the World Bank, IMF and US pressured Africans into dropping government subsidies for fertilizer and other farm inputs as a requirement to get aid making the continent food self-sufficient to food import continent.

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Introduction to Demand and Supply

Chapter objectives.

In this chapter, you will learn about:

• Demand, Supply, and Equilibrium in Markets for Goods and Services
• Shifts in Demand and Supply for Goods and Services
• Changes in Equilibrium Price and Quantity: The Four-Step Process
• Price Ceilings and Price Floors

Bring It Home

Why can we not get enough of organic foods.

Organic food is increasingly popular, not just in the United States, but worldwide. At one time, consumers had to go to specialty stores or farmers' markets to find organic produce. Now it is available in most grocery stores. In short, organic has become part of the mainstream.

Ever wonder why organic food costs more than conventional food? Why, say, does an organic Fuji apple cost $2.75 a pound, while its conventional counterpart costs $1.72 a pound? The same price relationship is true for just about every organic product on the market. If many organic foods are locally grown, would they not take less time to get to market and therefore be cheaper? What are the forces that keep those prices from coming down? Turns out those forces have quite a bit to do with this chapter’s topic: demand and supply.

An auction bidder pays thousands of dollars for a dress Whitney Houston wore. A collector spends a small fortune for a few drawings by John Lennon. People usually react to purchases like these in two ways: their jaw drops because they think these are high prices to pay for such goods or they think these are rare, desirable items and the amount paid seems right.

Visit this website to read a list of bizarre items that have been purchased for their ties to celebrities. These examples represent an interesting facet of demand and supply.

When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: that of a gallon of gas. Why was the average price of gasoline in the United States $3.16 per gallon in June of 2020? Why did the price for gasoline fall sharply to $2.42 per gallon by January of 2021? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept.

As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil.

This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities.

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Example Of Essay On Supply And Demand

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Supply and Demand

Demand for a product indicates the relationship between the price of the product and the quantity demanded, or the amount of a particular product that consumers would buy at a specific price level. Supply represents the relationship between the price of the product and the quantity supplied, or the quantity that producers are willing to sell at a given price. The change in quantity demanded or supplied is caused by a shift in price; however an increase or decrease of the whole demand or supply can only be cause by non-price factors. Thus, the demand for vacations in the theme park can be affected by the availability of substitute products and the price of the complements or it may alter in response to the change in the disposable income of the target customers. On the other hand, supply may be affected by the introduction of additional legislative barriers for theme parks, unavailability of suppliers for new equipment or unusually bad weather conditions, which make it hard to operate the park (Taylor & Weerapana, 2009).

Price elasticity measures the degree to which consumers change the quantity of the product purchased as the price for this product changes. It is calculated as a percentage change in the quantity of the product demanded divided by the price change for this product. If the absolute value of elasticity is above 1, than demand is price elastic. If elasticity falls into the range between 0 and 1, the demand is price inelastic (Taylor & Weerapana, 2009).

Price elasticity can be affected by a lot of factors, such as the number of substitutes in the market, the necessity of the product, the time period and the proportion of the total budget spent on the product. Thus, spending vacations in a theme park is likely to have high price elasticity, due to the fact that it is not a necessity for the majority of people. Therefore, the vacation can be easily forgone, once its price increases (Taylor & Weerapana, 2009). The high price elasticity of a vacation in a theme park can be also connected to the high price of this product, relative to the budget of an average person. A small increase in price for this product will significantly impact the financial situation of an individual. Therefore, people will try to switch to other alternatives once the prices for vacations go up. Moreover, price elasticity for a vacation in a theme park is largely affected by the number of substitute products available in the market. When people plan their leisure time, they face numerous alternatives, such as a vacation in the countryside, visit to the Zoo or a trip to the tourist attractions in the neighbourhood.

The price and availability of the complements may also have an effect on the price elasticity of demand. Thus, if the price of the bus, which brings people to the park, increases, the quantity of vacations in the park purchased is likely to decline and vice versa. If the restaurants in the park increase prices for their service, people will not go to the theme park as often. Hence, it is hard to predict the level of demand and supply for a particular product, such as a vacation in a theme park, because it is constantly altered by numerous factors.

Taylor, J. B., & Weerapana, A. (2009). Economics. (6th ed., pp. 52-70). Boston, the United States of America: Houghton Mifflin Company.

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• The Law of Supply and Demand
• How It Works

The Law of Demand

The law of supply, equilibrium price, factors affecting supply, factors affecting demand, the bottom line, law of supply and demand in economics: how it works.

• Economics Defined with Types, Indicators, and Systems
• Economy Definition
• History of Economics
• Is Economics a Science?
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• Macroeconomics
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• Law of Supply and Demand CURRENT ARTICLE
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What Is the Law of Supply and Demand?

The law of supply and demand combines two fundamental economic principles that describe how changes in the price of a resource, commodity, or product affect its supply and demand. Supply rises while demand declines as the price increases. Supply constricts while demand grows as the price drops.

Levels of supply and demand for varying prices can be plotted on a graph as curves. The intersection of these curves marks the equilibrium or market-clearing price at which demand equals supply and represents the process of price discovery in the marketplace.

Key Takeaways

• The law of demand holds that the demand level for a product or a resource will decline as its price rises and rise as the price drops.
• The law of supply says that higher prices boost the supply of an economic good and lower ones tend to diminish it.
• A market-clearing price balances supply and demand and can be graphically represented as the intersection of the supply and demand curves.
• The degree to which changes in price translate into changes in demand and supply is known as the product's price elasticity.
• Demand for basic necessities is relatively inelastic. It's less responsive to changes in their price.

Investopedia / Alex Dos Diaz

Understanding the Law of Supply and Demand

It may seem obvious that the price satisfies both the buyer and the seller in any sale transaction, matching supply with demand. The interactions between supply, demand, and price in a free marketplace have been observed for thousands of years.

Many medieval thinkers distinguished between a "just" price based on costs and equitable returns and one at which the sale was transacted, just like modern-day critics of market pricing for select commodities.

Our understanding of price as a signaling mechanism matching supply and demand is rooted in the work of Enlightenment economists who studied and summarized the relationship.

Supply and demand don't necessarily respond to price movements proportionally. The degree to which price changes affect the product's demand or supply is known as its price elasticity.

Price discovery based on supply and demand curves assumes a marketplace in which buyers and sellers are free to transact or not depending on the price.

Products with a high price elasticity of demand will see wider fluctuations in demand based on the price. Basic necessities will be relatively inelastic in price because people can't easily do without them so demand will change less relative to changes in the price.

Factors such as taxes and government regulation, the market power of suppliers, the availability of substitute goods, and economic cycles can all shift the supply or demand curves or alter their shapes. However, the commodities affected by these external factors remain subject to the fundamental forces of supply and demand as long as buyers and sellers retain agency.

The law of demand holds that demand for a product changes inversely to its price when all else is equal. The higher the price, the lower the level of demand.

Buyers have finite resources so their spending on a given product or commodity is limited as well. Higher prices reduce the quantity demanded as a result. Demand rises as the product becomes more affordable.

Changes in demand levels as a function of a product's price relative to buyers' income or resources are known as the income effect .

But some exceptions exist. One is Giffen Goods . These are typically low-priced staples also known as inferior goods . They're those who see a drop in demand when incomes rise because consumers trade up for higher-quality products.

The substitution effect turns the product into a Giffen good when the price of an inferior good rises and demand goes up because consumers use more of it in place of costlier alternatives.

Veblen goods are at the opposite end of the income and wealth spectrum. They're luxury goods that gain in value and consequently generate higher demand levels as they rise in price because the price of these luxury goods signals and may even increase the owner's status.

Veblen goods are named for economist and sociologist Thorstein Veblen who developed the concept and coined the term "conspicuous consumption" to describe it.

The law of supply relates price changes for a product to the quantity supplied. The law of supply relationship is direct, not inverse. The higher the price, the higher the quantity supplied . Lower prices mean reduced supply all else being equal.

Higher prices give suppliers an incentive to supply more of the product or commodity, assuming their costs aren't increasing as much. Lower prices result in a cost squeeze that curbs supply. Supply slopes are upwardly sloping as a result.

As with demand, supply constraints may limit the price elasticity of supply for a product. Supply shocks can cause a disproportionate price change for an essential commodity.

Also called a market-clearing price, the equilibrium price is that at which demand matches supply, producing a market equilibrium that's acceptable to buyers and sellers.

Supply and demand in terms of the quantity of the goods are balanced at the point where an upward-sloping supply curve and a downward-sloping demand curve intersect leaving no surplus supply or unmet demand.

The level of the market-clearing price depends on the shape and position of the respective supply and demand curves, which are influenced by numerous factors. 

Supply will tend to decline toward zero at product prices below production costs in industries where suppliers aren't willing to lose money.

Price elasticity will also depend on the number of sellers, their aggregate productive capacity, how easily it can be lowered or increased, and the industry's competitive dynamics . Taxes and regulations may matter as well.

Consumer income, preferences, and willingness to substitute one product for another are among the most important determinants of demand.

Consumer preferences will depend in part on a product's market penetration because the marginal utility of goods diminishes as the quantity owned increases. The first car is more life-altering than the fifth addition to the fleet. The living room TV is more useful than the fourth one for the garage.

What Is a Simple Explanation of the Law of Supply and Demand?

Higher prices cause supply to increase as demand drops. Lower prices boost demand while limiting supply. The market-clearing price is one at which supply and demand are balanced.

Why Is the Law of Supply and Demand Important?

The law of supply and demand is essential because it helps investors, entrepreneurs, and economists understand and predict market conditions. A company that's considering a price hike on a product will typically expect demand for it to decline as a result and will attempt to estimate the price elasticity and substitution effect to determine whether to proceed.

What Is an Example of the Law of Supply and Demand?

Gasoline consumption plunged with the onset of the COVID-19 pandemic in 2020 and prices quickly followed because the industry ran out of storage space. The price decline in turn served as a powerful signal to suppliers to curb gasoline production. Crude oil prices in 2022 provided producers with additional incentive to boost output.

The law of supply and demand reflects two central economic principles that describe the relationship between price, supply, and demand.

The law of demand posits that demand declines when prices rise for a given resource, product, or commodity. Demand increases as prices fall. On the supply side, the law posits that producers supply more of a resource, product, or commodity as prices rise. Supply falls as prices fall.

The price at which demand matches supply is the equilibrium, the point at which the market clears. The law of supply and demand is critical in helping all players within a market understand and forecast future conditions.

SSRN. " The First Laws in Economics and Indian Economic Thought – Thirukkural ."

JSTOR. " The Concept of the Just Price: Theory and Economic Policy. "

Thorstein Veblen, via The Mead Project. " Conspicuous Consumption ." Chapter 4 in The Theory of the Leisure Class: An Economic Study of Institutions.  The Macmillan Company, 1899, pp. 68-101.

Trading Economics. " Crude Oil ."

U.S. Bureau of Labor Statistics. " From the Barrel to the Pump: the Impact of the COVID-19 Pandemic on Prices for Petroleum Products ."

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Microeconomics Module – Supply and Demand Essay

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Ice-cream is one of the most popular food products in all parts of the world. In 2001 alone, the worldwide production of ice-cream reached an unprecedented 14.1 billion litres (Clarke, 2004). The United States remains an unchangeable leader of the ice cream market, with the annual consumption of approximately 22 litres per capita (Clarke, 2004). More than 90% of American households buy ice-cream and related products on a daily basis (Clarke, 2004). Two-thirds of ice-cream products are eaten outside home (Clarke, 2004).

It goes without saying that a multitude of factors affects the supply and demand of Baskin Robbins ice-cream. The main factors of demand include the number of buyers, income and tastes, price of complementary or substitute goods, as well as future expectations (Petroff, 2002).

Any increase in consumer incomes will inevitably increase the demand for ice-cream. Changes in tastes can increase or reduce the demand for Baskin Robbins products. For example, consumers will buy more ice-cream from Baskin Robbins, if eating ice-cream becomes a matter of prestige.

Simultaneously, consumers may easily switch to other ‘entertainment’ foods like popcorn or candies, if their price decreases. Baskin Robbins must be particularly cautious about consumer expectations, as any changes in future prices may cause serious shifts in the demand for ice-cream. Consumers who expect that food prices will grow may choose to stay away from ‘non-critical’ food products like ice-cream. If other food products become cheaper, consumers may choose to spend more money on Baskin Robbins products.

The main determinants of supply include the number of sellers, production costs, new technologies, prices of complementary goods, and future expectations (Petroff, 2002). As the number of ice-cream manufacturers increases, Baskin Robbins will have to reduce the supply of ice-cream products and focus on selling and marketing the most competitive product varieties. Lower taxes and new technologies will increase the supply of Baskin Robbins ice-cream products to the market.

Price always affects the amount of goods and services which consumers are willing to purchase. Quantity demanded is “the number of units of a good that consumers are willing and can afford to buy over a specified period of time” (Baumol & Blinder, 2008, p.57). Price is the main predictor of the quantity of ice-cream demanded by consumers.

The growing price of ice-cream will reduce consumers’ willingness to purchase the product. The demand for ice-cream products is extremely elastic, and changes in price may disproportionately affect the quantity demanded. However, price is not the only factor of changes in the supply and demand of ice-cream.

The effects of minimum wages on the market and consumers are well-documented. In 1940, Hagen wrote that any increase in minimum wages would expand the economy’s propensity to consume through changes in income distribution and at the expense of businesses and entrepreneurs. Simply stated, when the government raises the minimum wage, it also increases consumer incomes and the economy’s purchasing power.

As a result, consumers will have more money to spend on ice-cream. Simultaneously, any increase in the minimum wage adds to the burden of production costs on firms. Baskin Robbins will have to spend more on wages and salaries for its employees. In this situation, the firm will either have to raise the price of ice-cream or reduce the amount of products supplied to the market. Whatever the choice, Baskin Robbins will have to change its business strategies, to maximize its profits under the new market conditions.

A multitude of factors affects the supply and demand of ice-cream. Price always predetermines the amount of good consumers are willing to purchase. Any increase in the minimum wage will increase consumer incomes and add to the burden of costs on firms. As a result, businesses will have to adjust their strategies, to maximize their profits under the new market conditions.

Baumol, W.J. & Blinder, A.S. (2008). Microeconomics: Principles and policy. Boston: Cengage Learning.

Clarke, C. (2004). The science of ice-cream. London: Royal Society of Chemistry.

Hagen, E.E. (1940). Elasticity of demand and a minimum wage. The American Economic Review, 30(3), 574-576.

Petroff, J. (2002). Chapter 1: Demand and supply . Microeconomics. Web.

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