Updated: Feb 3
You may hear that the economy depends on two things. The Law of Demand & Supply
The Law Of Demand.
Demand is how much of a product consumers are willing to purchase, at different price points, during a certain time period.
In reality, we only have a certain amount of income and time, so we have to decide what goods and services to purchase and which ones to leave.
A practical example.
If the price of chocolate (an important essential item, we all know it) is £3.00 per bar (we are thinking expensive chocolate here), people may be willing and able to purchase 5 bars per week.
If the price drops to £1.55 per bar, they may buy 7 bars per week. And at £0.50 per bar they may buy 10 bars.
This little exercise proves there is an "inverse" relationship between price and quantity demanded. As the price of chocolate falls, the demand increases , creating a downward slope.
The Law Of Supply.
Supply follows a similar principle but is more focused on how much of a product a supplier is willing and able to offer their product to the market for, at specific price points, during a certain time period.
Like demand, there is a certain pattern tied to supply. It’s something called a direct curve. As the price falls, supply does too. When the selling price is low, only producers with low production costs can make a profit, so only a few producers will sell their products. When the price is high, even producers with high costs can make a profit, so everyone produces.
I bet you’re thinking, shouldn’t there be some kind of point where suppliers (who want the higher prices) and consumers (who want the lower prices) meet and all is well with the world?
Yes, It’s called market "equilibrium” price.
It dictates the price point at which consumer demand equals the amount that suppliers are willing to supply. When in equilibrium there is no surplus and no shortage of goods.
See you next time for more economics chat!