Supply and Demand
Demand refers to the amount of a good or service that consumers will buy at a given time at various prices. It is the immediate driving force of the economy. On the other hand, supply refers to the quantities of a good or service that producers will provide on a particular date at various prices. In other words, Demand is a shorthand way of describing the behavior of buyers, whereas supply refers to the behavior of sellers. Both work together to impose a kind of order on the market system.
Buyer’s Perspective
The forces of supply and demand determine the market price for products and services. Say that you’re shopping for blue jeans, and the pair you want is priced at $35. This is more than you can afford, so you don’t make the purchase. When the store puts them on sale the following week for $18, however, you run right in and buy a pair.
But what if the store had to buy the jeans from the manufacturer for $20. It would have made a profit selling them to you for $35, but it would lose money selling them for $18. What is the store asks to buy more from the manufacturer at $10 or $15 but the manufacturer refuses? Is there a price that will make both the supplier and the customer happy? The answer is yes—the price at which the number of jeans demanded equals the number supplied.
Seller’s Perspective
Now think about the situation from the seller’s point of view. In general, the more profit the store can make on a particular item, the more of that item it will want to sell. This relationship can also be depicted graphically. The store would be willing to offer 30 pairs of jeans at $35, 25 pairs at $30, and so on. The store’s willingness to carry the item increases as the price it can change and its profit potential per item increase. In other words, as price goes up, quantity supplied goes up.
Increasing supply to meet demand is not always easy. A company’s productivity is often determined by its access to resources, its stock of machinery, the skills and talents of its people, and overall morale. Often these are not controllable factors. For example, what if Ted Waitt could not find enough skilled employees to assemble Gateway computers? What if the equipment used in Gateway’s assembly operation were obsolete? Or what if Waitt wasn’t willing to take the necessary risks to start his business in the first place? Labor, equipment, and risk takers are inputs that all societies use to produce goods and services. Economists call these inputs factors of production.
Reference
Buyer’s Perspective
The forces of supply and demand determine the market price for products and services. Say that you’re shopping for blue jeans, and the pair you want is priced at $35. This is more than you can afford, so you don’t make the purchase. When the store puts them on sale the following week for $18, however, you run right in and buy a pair.
But what if the store had to buy the jeans from the manufacturer for $20. It would have made a profit selling them to you for $35, but it would lose money selling them for $18. What is the store asks to buy more from the manufacturer at $10 or $15 but the manufacturer refuses? Is there a price that will make both the supplier and the customer happy? The answer is yes—the price at which the number of jeans demanded equals the number supplied.
Seller’s Perspective
Now think about the situation from the seller’s point of view. In general, the more profit the store can make on a particular item, the more of that item it will want to sell. This relationship can also be depicted graphically. The store would be willing to offer 30 pairs of jeans at $35, 25 pairs at $30, and so on. The store’s willingness to carry the item increases as the price it can change and its profit potential per item increase. In other words, as price goes up, quantity supplied goes up.
Increasing supply to meet demand is not always easy. A company’s productivity is often determined by its access to resources, its stock of machinery, the skills and talents of its people, and overall morale. Often these are not controllable factors. For example, what if Ted Waitt could not find enough skilled employees to assemble Gateway computers? What if the equipment used in Gateway’s assembly operation were obsolete? Or what if Waitt wasn’t willing to take the necessary risks to start his business in the first place? Labor, equipment, and risk takers are inputs that all societies use to produce goods and services. Economists call these inputs factors of production.
Reference
- Michael H. Mescon, Courtland L. Bovée, John V. Thill, Business Today, 9th edition, Prentice Hall, 1999
