The Law of Supply and Demand

Price and Quantity Demanded: The Law of Demand

 
The law of demand is the negative relationship between price and quantity demanded. It states that
all other factors being equal, as the price of a good or service increases, consumer demand for the
good or service will decrease and vice versa. It says that the higher the price, the lower the quantity
demanded because opportunity cost in  acquiring such good or service also increases which only
means that one must make more tradeoffs to get the more expensive product. The law of demand
explains the effect of changes in price to consumer behaviour. When a t-shirt is on sale, one might
buy two instead of only one. The quantity demanded increases because the price has decreased.
Demand schedule - a table that shows how much of a given product a household would be willing to
buy at different prices.

Demand curve- a graph that shows how much of a given product a household would be willing to
buy at different price.

The law of supply is the positive relationship between price and quantity of goods supplied. It
states that all other factors being equal, as the price of a good or service increases, the
quantity of goods or services that suppliers offer also increases and vice versa.
It simply means that as the price of an item goes up, suppliers will attempt to maximize their
profits by increasing the quantity offered for sale.
Law of supply depicts the product behaviour at the time of changes in the price of goods and
services
When consumers are more willing to pay for a cup of coffee, people will see this as an
opportunity to start a business, thus, there is an increase in the number of coffee shops .
 The Law of Supply and Demand

Supply schedule -a table that shows how much of a product firms will sell at different prices.

Supply Curve - a graph that shows how much of a product a firm will sell at different prices.

3 Conditions Prevailing in the Market

Excess demand or shortage exists when quantity demanded exceeds quantity supplied at the current
price.
Excess supply or surplus exists when quantity supplied exceeds quantity demanded at the current price.
Equilibrium is the condition that exists when quantity supplied and quantity demanded at the current
price is equal. Or simply, the point where the demand and supply curves intersects. When in an
equilibrium, there is no tendency for price to change.

What are the factors affecting demand of a product?

The factors that influence demand of product includes price, consumer income and wealth, price of
other goods and services, tastes and preferences, and expectations.
1.Price
Demand of a product is negatively related to its price—as price increases, demand decreases. Also,
products have different sensitivity to changes in price. Price sensitivity is the degree to which the price
of a product affects consumers' purchasing behaviours. In economics, price sensitivity is commonly
measured using the price elasticity of demand. When a good or service is inelastic, there is a little
change in quantity demanded if price changes. For an elastic good there is a substantial change in the
quantity demanded when price changes.
Always put in mind that changes in price do not result to a shift in demand, rather it causes the demand
to move along the demand curve only. The rest of the factors on the other hand, influences demand to
shift either to left or right.
2.Consumer Income and Wealth
Income The sum of  a household’s wages, salaries, profits, interest payment, rents, and other forms of
earnings in a given period of time. It is a flow measure.
 Wealth The total value of what a household owns minus what it owes. It is a stock measure.
 The Law of Supply and Demand
Consumers with higher income and accumulated savings can obviously afford to buy more goods and
services. Goods and services for which demand goes up when income and wealth is higher and goes
down when income/wealth is lower are commonly called normal goods. But there can be cases where
in demand falls even though income/wealth rises. These goods are called  inferior goods.
3.Price of other Goods
Consumers appropriate their money over different goods and services thus purchases are greatly
affected by prices of other goods.
substitutes Goods that can serve as replacements for one another; the increase in the price of one good
cause the demand for another good to increase.
(a positive relationship : when the price of one  increases, demand for the other increases)
perfect substitutes Identical products
complementary goods Are goods that go together—a decrease in the price of one results in an
increase in demand for the other and vice versa.
4.Tastes and Preferences
A lot of things can influence a consumer thus causing him/her to change his/her tastes and
preferences. Umbrellas tend have higher demand on rainy days. Notice also the rapid increase of
different cafes. Before there were only very few cafes because there were only a small number of
people who prefer to go to a café but now it has attracted almost everyone.
5.Expectations - When a person decides to buy or avail of a service his/her expenses are determined
depending on the current price and his/her income/wealth. But people always expectt for an increase in
his/her salary or an increase in his/her accumulated savings and this might affect his/her demand. Also
people expect that there will be changes in price in the future which can affect his/her decisions today.
An example is when a new phone is introduced its price is quite high and it is expected to lower down
after a few month so some actually takes advantage of the price difference and decides to buy the
product only when it happens.
What are the factors affecting supply of a product?
The factors affecting the quantity supplied includes cost of production, input prices, technology, and
prices of related goods.
1.Cost of Production
A person is enticed to offer goods and services in the market because there is an opportunity to gain.
Profit is gained when only when it exceeds costs. When he/she sees that after producing the goods, he
can sell this at a certain price that will allow for profit, he/she would be willing to offer such goods in the
market.
2.Input Prices
The prices of the factors for production directly influences one’s cost of production. When there is an
increase in the price of one input there will also be an increase in the overall cost of production. Notice
that when there is an increase in the price of gasoline fare prices in the jeepneys also increase.
3.Technology
Technology is another factor that has a direct effect in the cost of production. Although it is costly at the
start of the implementation of the new technology, the investment of good technology would likely to
give positive results. In agriculture for example, the usage of technology would allow the increase of the
yield of crops.
4.Expectations 
The amount of ice cream a firm supplies today may depend on its expectations about the future. For
example, if a firm expects the price of icecream to rise in the future, it will put some of its current
production into storage and supply less to the market today.
5.Number  of  Sellers
In addition to the preceding factors, which influence the behavior  of  individual  sellers,  market 
supply  depends  on  the  number  of  these sellers. If Ben or Jerry were to retire from the ice-cream
business, the supply in the market would fall.
6.Prices of Related Goods
Recall that there is a positive relationship between price and the quantity supplied. So when an
alternative good increases its price, the supply would want to produce more of that product. When
the price of eggs increases the tendency is the supplier would want to raise more chickens in order to
sell more eggs in the market.
The Law of Supply and Demand