When we discuss the subject of economics, terms such as supply, demand, and equilibrium price are often mentioned. It is also common to see graphs which contain the supply and demand curve. We might ask, why are these terms so important when discussing economics? The answer is because these terms are the key components in the subject of economics. Therefore, before we can fully understand economics we must first understand the terms and how they are related.
Demand can be described as the relationship between the price and quantity demanded for a particular good or service in specific circumstance. For each price provided, the demand relationship will tell the quantity that the customers are willing to purchase at a corresponding price. The quantity the customers are willing to purchase at a particular price is called the Quantity Demanded. An important thing to do is distinguish between demand and the quantity demanded. To explain the concept, the buyers are the people who want or need the product or service. The term “demand” refers to the willingness and ability of customers to purchase the good or service in the market. The demand relationship expresses the willingness and ability for the whole assortment of prices. To claim that a customer has a demand for a particular item is to declare that the customer has money with which to buy the item and is willing to exchange the money for the item. Customers do not demand what they do not truly want or need; therefore, a want or a need that lacks purchasing power is not a demand. With that in mind, it is not enough that the suppliers possess the good or the ability to perform a service. Economists usually treat supply symmetrically as demand. This means that they treat supply as a correlation between price and the quantity supplied. Supply also means willingness to sell, and the supplier must be willing to sell the item or service at a price that the customers will demand it. Demand is not a particular quantity since the quantity that people are willing and able to purchase will change in response to the price changes. There is a methodical relationship between the price in the marketplace and the quantity that customers are willing and able to purchase. This relationship is called the “demand relationship.” The amount that customers buy at each price level is called the “quantity demanded” at that price.
In economics the relations of supply and demand is understood as the equilibrium. Think of demand as a force which tends to increase the price of a good or service. Then think of supply as a force which tends to reduce the price. When the two forces are balanced, the price will neither increase or decrease they will be stable. This analogy allows us to think of the stable or natural price in a particular market as the equilibrium price. This type of equilibrium exists when the price is high enough that the quantity supplied equals the quantity demanded. On a diagram the equilibrium is the price at which the two curves intersect. The subsequent quantity is the amount that will be traded in a market equilibrium.
The Law of Demand states that the demand curve is downward sloping. There are two types of change in demand. The first is movement along the demand curve, and the second is a shift among the demand curve. A movement along the curve is usually caused by a change in the price of the good or service. For example, a decline in the price of the good results in an increase of demand. An increase in price causes a reduction of demand. A shift in the demand curve is generated by a change in any non-price factor of demand. The curve can shift to the right or left depending on the situation. A rightward shift represents an increase in the total quantity demanded, as shown with D1 to D2, while a leftward shift signifies a decrease in the total quantity demanded shown with D1 to D3.
These movements can be caused by several factors. A change in customer’s income such as when their income increases will affect the demand. When this occurs customers usually buy more normal or luxury items and the demand curve will shift to the right as shown with D1 to D2. Another change factor is when there is a change in price of supplementary goods. If the price of a substitute good increases then the demand for the good will decline. This will cause a leftward shift in the demand curve of any complementary good D1 to D2. The reverse can also occur. If the price of the substitute good rises, then the demand for the other good will increase as the customers switch their purchasing patterns D1 to D2. Changes in tastes and fashions also affect the demand. If a good becomes fashionable then the demand for the good will shift to the right D1 to D3. Or the good can become outdated and the shift will move to the left.
Demand is the relationship between the price of the item and the quantity that consumers are willing to buy. Supply is the relation between the price and the amount that producers are willing to sell. When we apply these two concepts, we discover the market equilibrium with the price and quantity at the intersection of the supply and demand chart. When we tie all of the concepts together we can identify a price high enough that the quantity demanded will be equal to quantity supplied as well as the quantity corresponding to that price.