In economics, the law of demand and supply is the most fundamental law helps to determine the prices of commodities. It is useful for both producers and consumers as it guide them when and how much to produce and how much to buy. This article would be easy guide in understanding the law of demand and supply.
Simple understanding the law of demand and supply
For layman’s understanding, prices are determined by relationship of demand and supply of goods and services in the market, given the other factors are constant.
If the demanded quantity of commodity exceeds supply, the prices of the given commodity will rise. And, if the demanded quantity of commodity is less than the supply, the prices of the given commodity will fall.
In simple term, if there is more supply, prices will fall. And, if there is lesser supply, prices will rise. Let’s look at the following relationship between demand and supply. Here is the possibilities of rise and fall of prices in relations with demand and supply.
Demand > Supply = prices will rise
Demand < Supply = prices will fall
Demand ~ Supply = Equilibrium
Market competition, market equilibrium and market failure
If there is no barriers to entry and exit for the new entrants in the market, and the prices of the commodity are fully determined by the free market forces of demand and supply, it is termed as open and competitive market. There is no single buyer and sellers. No one is price maker but taker, there are many players in the market selling identical commodity.
Market equilibrium and market failure
On the other hand, if there are external restrictions by government, the prices of commodity will be either rise or fall, in such situation, market fails to allocate resources efficiently, it is known as market failure.
Hence, it is highly essential to let the market function naturally driven by the market forces of demand and supply.
In case of market equilibrium, the demand and supply of the commodity is same and there is no change in the prices. The perfect market equilibrium is a hypothetical and hardly possible in the today’s market.
How does law of demand work?
In the process of presenting easy guide to learn law of demand and supply, hereon, I’m going to explain the law of demand.
Easy guide to learn the law of demand
The law of demand explains how the prices of commodity will determine the commodity demanded by consumers. If the prices are more, there is lesser demand for quantity. And, if the prices are less, the demand would be more on condition that other factors are constant.
Suppose, you prefer to buy onions at the rate of 1$ per kg. Tentatively, this is the rate at which producers also prefer to sell theirs onions. Simply, this is the market equilibrium of onions.
Then, what would happen if there is fall in the prices? Obviously, consumers will buy more quantity than they would have not if the prices were more. In simple terms, if there is fall in the prices of onions, consumers will buy more quantity. On the other hand, consumers will buy lesser, if the prices are rocketing.
Explaining Demand curve
Demand curve is a graphical representation of relationship between prices and demanded quantity of commodity in the market. It shows downward tilt as the demanded quantity falls with rise in prices. Demand curve has been drawn with the help of X and Y axis. Y axis indicates prices, while Y axis indicates demanded quantity.
Simple explanation of law of supply
The law of supply is the third law in the process of presenting easy guide to learn law of demand and supply. Let’s go in details of the law of supply.
In microeconomics, the law of supply explains how the prices of goods and services determine the supply of goods and services in the market, given other factors are constant.
For better understanding, it shows the relationship between rise and fall in prices and it’s effect on supplied commodity. Higher the prices, greater the supply and vice-versa.
In other words, there is proportionate or positive relationship between prices and supplied commodity.
Describing supply curve
Supply curve is a graphical representation of supply of commodity in relations with prices. It is drawn on the X and Y axis. X axis indicates supplied commodity, while Y axis shows prices of commodity in market. Supply curve shifts upward from left to right as the supply increase. Compare to demand curve, it shows reverse Or opposite pattern.
Importance of understanding the law of demand and supply
In micro economics, every individual economic unit strive to be more competitive by making commodity more cheaper than rivals to capture more market power.
Second, the law of demand and supply also known as market force provide insight how invisible hand works to ensure market equilibrium without government interventions.
The law of demand and supply helps them to learn how to use factors of production more efficiently to achieve competitive advantage. Nowadays, when the market is expanding never before, the importance of the law of demand and supply become much more essential.
Elasticity and inelasticity of demand