Supply and demand forms a fundamental model in any competitive market and economy. Demand refers to the product quantity that buyers are willing and able to buy. Quantity demanded is therefore the demand of products and services that customers are willing to purchase at a particular price. Supply refers to the amount of products that services that products are willing to offer to the market. Quantity supplied is therefore the amount of products producers are willing to offer for sale at a certain price.
The correlation between price and quantity demanded and price and quantity supplied is known as demand relationship and supply relationship respectively. Price is therefore a function of demand and supply. In any free market economy, the demand and supply relationship forms the basis for efficient allocation of resources. This paper examines the laws of demand and supply and how they determine the market prices (Investopedia, 2009). The laws of demand and supply
The law of demand holds that all factors constant, as product prices rise, the quantity demanded for that product falls. The reverse is true when the product price falls. This is because the amounts of goods and services buyers are willing and able to buy depend on their price, so as prices rise, the opportunity cost of purchasing such products also increase. This means that buyers would substitute the consumption of such products with more valuable products.
The law of supply states that all factors constant, as product prices goes up, the quantity supplied rises. As shown in figure1, the relationship between quantity demanded (Q) and price (P) yields a negative slope. This means that the higher the product price, the lower the quantity of the product demanded and vice versa. Unlike the demand law, the relationship between price and quantity supplied results into an upward slope as shown in figure1 by the supply curve, Supply (s).
This means that as product prices become high, the quantity supplied increases because producers supply more taking advantage of the high prices and thereby making profit Investopedia (2009). Equilibrium The point of intersection between demand and supply curves is called the equilibrium point. At this point supply and demand are equal and the market forces are said to be at equilibrium. The allocation of goods and services is therefore efficient since the quantity demanded exactly equals quantity supplied.
Producers are selling all the products supplied at an optimal price and consumers have access of products demanded at all times. As can be seen from figure1, the point of intersection between demand and supply curves is called equilibrium where product prices and quantity demanded are denoted by PE and QE respectively. PE and QE refers to equilibrium price and equilibrium quantity respectively. In a real market situation, the equilibrium is difficult to be maintained because of constant fluctuation of demand and supply functions.
As a result there is always disequilibrium where the quantity and demand deviates from QE and PE. This condition arises as a result of a number of factors such as excess supply and excess demand. These excesses results into a shortage or a surplus. A surplus results when the quantity supplied is greater then the quantity demand and a shortage results when the quantity demanded is greater then the quantity supplied (Investopedia, 2009). Elasticity Elasticity refers to the degree to which demand and supply functions adapt to fluctuations in price.
It depends on products since basic consumer products are more vulnerable to price fluctuations than other products. This is because consumers never stop purchasing these products even when their prices increase. When a slight fluctuation in price of a product causes a sharp change in its demand and supply, such as product is said to have be highly elastic. On the other hand, products whose price fluctuations do not significantly affect changes in there demand and supply are said to be inelastic. Elasticity can be represented as an equation as shown: