One of the most important concepts of economics is supply and demand, which is the chief support of a market economy. The relationship between these two factors assists in outline the allocation of resources in the most effective way possible.
The demand of a product or service represents the quantity desired by buyers. In other words, demand is the quantity of a product or service that people are keen to purchase at a certain price. The law of demand affirm that, if all other factors don’t alter, the higher the price of a product, the less buyers will demand it. This happens because, as price increases, so does the opportunity cost of buying that product. Consequently, people would avoid ...view middle of the document...
The supply diagram shows an inverse situation to demand diagram. At price P1 (smaller price), the quantity would be Q1 (smaller quantity), while at price P2 (bigger price), the quantity would be Q2 (bigger quantity).
The relationship between supply and demand can affect the price of a product. For example, suppose that a new book has been released at the price of £10. As the publisher’s previous analysis suggested that consumers wouldn’t buy books at a price higher than £10, only a hundred books were released, considering that the opportunity cost is too high for suppliers to produce more. However, if a hundred books were demanded by two hundred people, the price would consequently rise in accordance with the demand relationship (as demand increases, so does the price). The rise in the price should speed the production of more books, as the supply relationship states that the higher the price, the higher the quantity supplied. On the other hand, if there were 200 books produced, but the demand is still 100 books, the price will not be raised because the company supplies more than accommodates demand. In fact, after the 100 consumers have been satisfied with their book purchases, the price of the lasting books may drop, as book publishers would try to sell the remaining 100 books. As a result, the lower price would make the book more available to people who had formerly decided that the opportunity cost of buying the book at £10 was too high.
There are two important phenomena that occur in both supply and demand curve, the movements along and the shifts. The movements refer to a change along a curve. On the demand curve, a movement is related to a change in both price and quantity demanded from one point to another, as shown in the diagram Movement Along the Demand Curve, where the movement implies that the demand relationship remains consistent. In simpler words, a movement along happens when a change in quantity demanded is caused only by a change in price, and vice versa. Observe that, P1 and Q1 are one point, and so are P2 Q2, P3 Q3, and so on.
Likewise a movement along the demand curve, a movement along the supply curve implies that the supply relationship remains consistent. Therefore, it occurs when the price of the good changes, so does the quantity supplied, but in accordance to the original supply relationship. In other words, a movement along with a supply curve happens when a change in quantity supplied is caused only by a change in price, and vice versa. In the diagram Movement Along the Supply Curve, note that P1 and Q1 are one point, and so are P2 Q2, P3 Q3, and so on.
Different from movements, a shift in a demand or supply curve takes place when the quantity supplied or demanded of a good change, however the change is related to anything but price, as it remains the same. For instance, let’s imagine D1 at price P1 and quantity Q2 as the original demand relationship. When the demand curve shifts to the right side, it means that...