Supply and Demand

Supply and Demand, also known as the law of supply and demand, are two primary forces in the market. The concept of supply and demand is an economic model to represent these two forces. This economic model discloses the equilibrium price for a given product. It is a price point where the amount consumer demands for goods mees the price suppliers are willing to accept to produce the desired quantity of that good. The supply and demand graph shows why prices for an apartment rises quickly in the market when there is a lot of demand but little supply or how prices for good like oil can fall when refiners discover new deposits of oil, enhance production, or release millions of barrels of crude oil held in reserve. Supply and demand graphs not only represent price but also represent a decrease in wages when there is high unemployment, or how the interest rate affects the supply of money.

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What is the Law of Demand?

The law of demand describes the relationship between the quantity demanded and its price. According to Alfred Marshall,  the law of demand states that the quantity demanded decreases with rise in price and increases with fall in price. Hence, it represents an inverse relationship between quantity demanded and price.

Assumptions of Law of Demand

• No change in the taste and preference of the consumer.

• No change in customs

• Income of the consumer remains constant.

• No substitutes of the commodity are there

• No change in the price of other related goods

• Law of demand does not hold those goods which confer social distinction.

• No possibility in change in the price of the product being used

• No change in the quality of the product

• The habits of consumers remain unchanged.

The law of demand works only in these conditions. If there is a change even in one of these conditions, it will stop working. 

What is the Law of Supply?

The law of supply states that other things being constant, the supply of commodities rises i.e. expands with rise in price and falls i.e contracts with fall in price. 

In other words, the law of supply states that higher the price of the product higher the supply and lower the price of the product lower the supply.

The law of supply suggests that supply changes directly with change in price. Hence, a higher quantity of goods are supplied at a higher price and vice versa.

Assumptions of Law of Supply

Important assumption of law of supply are as follows:

• No change in the price of the factor of production.

• No change in production technique.

• No change in transportation cost.

• No change in cost of production

• Scale of production is constant. i.e. fixed.

• No speculations about the future changes in the price of the product.

• Prices of other related goods remain constant i.e. no change.

• No change in government policies related to the price and production of the commodities.

• No change on the firm’s goal.

Exception To The Law of Supply

According to the general rule, quantity supplied increases with rise in price and decreases with decrease in price.  However, in certain cases, the positive relationship between quantity supplied and price may not hold true. 

• The law of supply does not apply to agricultural products as their production depends on climatic conditions.

• In the case of perishable goods like vegetables and fruits, suppliers are willing to sell more even if the price of these goods is falling.

• Rare and precious articles also do not fall under the law of the supply category. Even if the price of rare articles like paintings of Monalisa increases, the quantity supplied of such goods cannot be increased.

• Production and supply in backward countries cannot be increased with rising in prices due to the shortage of resources.

Demand Supply Curve

Let us now discuss the demand and supply curve along with their graphical representation:

Demand Curve And Its Slope

The demand curve is the graphical representation of the relationship between different quantities of commodities at different possible prices. The concept of demand curve includes: 

• Individual Demand Curve

• Market Demand Curve

Let us understand the Individual And Market Demand Curve in detail.

Individual Demand Curve

The individual demand curve is a curve representing different quantities of commodities that one particular buyer is ready to buy at a different possible price of the commodity. In the individual's demand curve diagram given below, the quantity of the commodity is shown on the horizontal axis and price on the vertical axis. The curve in red represents the individual demand curve. 

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In the above diagram, the demand curve slopes downward. It shows the inverse relationship between price and quantity demanded. The 4 units of quantity are demanded when the price is 40 per unit while only 2 units of a commodity are demanded when the price increases to 80 per unit.

The demand curve slopes downward from left to right indicating the inverse relationship between the price of the commodity and the quantity demanded. Higher price leads to falling in quantity demanded whereas a fall in price leads to a rise in quantity demanded of a commodity.

Market Demand Curve

Market Demand Curve is defined as the horizontal summation of the individual demand curve.

It represents the various quantities of commodities that all buyers are ready to buy at different possible prices at a given point in time.

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The figure given above shows the market demand curve. Here Consumer  1 and Consumer  2 are two individuals in the market.  Figure (1) is Consumer 1’s demand curve, Fig (2) is Consumer’s 2 demand curve, and Figure (3)  is the market demand curve. Here, when the price is 1 per unit of good X,  Consumer 1 demand is 2 units and  Consumer  2 demand is 1 unit.  Accordingly, total market demand  is 1 + 2 = 3 units. Whereas when the price is 2 per unit market demand is 1 + 0 = 1 unit. The market demand curve slopes downward as it represents the inverse relationship between the price of the commodity and the quantity demanded.

Supply Curve 

The supply curve is the graphical representation of the relationship between different quantities of commodities offered for sale at different possible prices of that commodity. It represents the positive relationship between the price of a commodity and its quantity supplied. The concept of supply curve includes: 

• Individual Supply curve

• Market Supply Curve

Let us now discuss Individual And Market Supply Curve in detail below:

Individual Supply Curve

Individual supply curve is a curve representing different quantities of commodities that one particular producer or supplier is ready to supply at a different possible price of the commodity. In the individual supply curve diagram given below, quantity of commodity supplied is shown on X-axis and price on Y-axis. SS  is the supply curve.

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In the above diagram, the supply curve slopes upward. It is drawn as a straight line representing that more commodities are supplied at higher prices. In the above diagram, we can see that if the price is Rs.30 per unit, the firm is ready to sell 5 units of commodities. On the other hand, if the price increases to Rs.40 per unit, the quantity supplied increases to 10 units.  Hence, the individual supply curve is representing the positive relationship between the price of a commodity and its quantity supplied i.e higher quantities are supplied at higher prices and vice versa.

Market Supply Curve

The market supply curve is a horizontal summation of the individual supply curve representing different quantities of commodities that all the producers or suppliers in the market are ready to supply at a different possible price of that commodity.

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In the above diagram, we can see that when the price is Rs. 30 per unit,  market supply is (5 + 10) = 15 units whereas when the price increases to Rs. 40 per unit, the market supply increases to (10 + 15) = 25 units of commodities.

Conclusion 

Supply and demand are two important topics to understand as it helps us to know how the demand and supply of commodities changes with change in price. Also, it helps us to understand how the economy works. The Covid-19 pandemic enables many people to understand how quickly the economy changes. These two terms will be the most fundamental concepts in economics.