Everything you ought to know about the Demand and Supply Analysis of economics

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The satisfaction of human wants is linked with the production of goods and services and their pricing process. The price of any good in the market is determined by the interaction of demand and supply. Demand in economics is an effective desire for a good backed by ability to pay and willingness to pay. Demand is always at a price and per unit of time.

Demand for a commodity is the amount of a commodity that a consumer will purchase in the market at a given price in a given period of time. Demand of an individual is a function of the price of the commodity, his money income, his tastes and prices of other related commodities.

There are individual and market demand schedule. A demand schedule is a table or chart showing different amounts of a good demanded at different prices at a given point of time. A demand curve is down ward sloping from left to right.

In exceptional cases are giffen goods, prestige goods, future expectations or speculation, war or emergency and ignorance of the consumer etc. the law of demand can be known from the demand schedules. It states that other things remaining constant, rising price leads to falling demand and falling price leads to rising demand. The reasons of the downward sloping demand curve are that the law of demand is based on the law of diminishing marginal utility, income effect and substitution effect.

There may be extension and contraction and increase and decrease in demand. Change in quantity demanded refer to the movement along the same demand curve. In this case, other things remain constant, only price changes. As a result, there may be extension or contraction in demand. Changes in demand imply the shift of the demand curve. In this case, there is no change in price but other factors affecting demand change. There may be increase in demand or decrease in demand.

Elasticity of demand refers to the responsiveness of demand to the change in price. It is the proportionate change in quantity demanded divided by proportionate change in price.

Elasticity demand is governed by factors like nature of the good, availability of substitutes, number of uses, proportion of income spent on the goods, possibility of postponement, durability of the good, range of price and range of income etc. demand may be perfectly elastic and inelastic, relatively elastic and inelastic and unit elastic.

Like demand, supply is always at a price and at a given period of time. Supply of good is a function of the price of the good. Price of other commodities, producers’ decision etc. there are individual supply schedule and market supply schedule and market supply schedule. The total of individual supply schedules makes the market supply schedule.

A supply schedule is a table or chart showing different amounts of good supplied at different prices at a given period of time. The law of supply can be known from the supply schedule.

The law of supply states that other things remaining constant rising price leads to rising supply and falling price leads to falling supply. The supply curve is upward slopping from left to right. There may be change in supply and change in quantity supplied. Change in quantity supplied refers to the extension and contraction in supply, where price of the commodity changes but other factors do not change. It implies movement on the same supply curve. Change in the quantity supplied implies increase and decrease in supply. It means shift of the supply curve. In this case other factors change but price of the good remains constant.

Elasticity of supply refers to the responsiveness of the supply to the change in price. It means percentage change in supply divided by percentage Change in price. It expresses the degree of correlation between price and supply. Like elasticity of demand, elasticity of supply may be perfectly elastic and inelastic, relatively elastic and inelastic. Elasticity of demand can be measured by the Marshallin total expenditure method and point method (on a straight-line demand curve).


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