Supply and demand: Difference between revisions

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The law of '''supply and demand''' is a fundamental law of [[economics]]. It can be stated as follows:
The law of '''supply and demand''' is a fundamental law of economics. It can be stated as follows:
*the quantity of a commodity that consumers are prepared to buy, rises when the price of that commodity falls (and vice versa);
*the quantity of a commodity that consumers are prepared to buy, ''(normally)'' rises when the price of that commodity falls,and vice versa;
*the quantity of a commodity that suppliers are prepared to sell, rises when the price of that commodity rises (and vice versa); so that,
*the quantity of a commodity that suppliers are prepared to sell, ''(normally)'' rises when the price of that commodity rises, and vice versa; so that,
*the price at which transactions eventually take place is that at which the quantity that consumers are prepared to buy is the same as the quantity that suppliers are prepared to sell.
*the price at which transactions eventually take place is that at which the quantity that consumers are prepared to buy is the same as the quantity that suppliers are prepared to sell.
The eventual price at which the hypothetical bargaining settles down is referred to as the ''market clearing'' or ''equilibrium'' price (higher prices result in unsold surpluses, prompting suppliers to reduce their prices and vice versa).
''(The word "normally" is inserted in recognition of the exceptions noted in the concluding paragraph of this article)''


This is among the most familiar of all economic concepts; so much so that one might be tempted to regard it as a statement of the obvious, but its dissemination by the British economist Alfred Marshal in 1891 <ref> Alfred Marshall The Principles of Economics Chapter 3, Phoenix Books 1997 (1st edition 1891) </ref> introduced a major departure in economic theory. Previous economists, from Adam Smith to Karl Marx, had taught that prices were determined by the cost of production. (See [[history of economic thought]]).
The eventual price at which the hypothetical bargaining settles down is referred to as the ''market clearing'' or ''[[equilibrium]]'' price. Higher prices result in unsold surpluses, prompting suppliers to reduce their prices, and vice versa.  


It is important to understand that the general rules stated above depend on a large number of assumptions, some or all of which may not be correct in a particular situation.  For example, for certain goods that are absolutely necessary, or almost necessary, a rise in price may not affect the demand to any significant degree. Instead, consumers will simply spend more money on that good or service.  Governments tend to rely on this fact, and often impose taxes on those goods or services the demand for which is insensitive to price.  When demand or supply changes significantly in response to small changes in price, it is called "elastic."  When demand or supply is relatively insensitive to such changes, it is called "inelastic."


In his further exploration of the concept, Marshall introduced some further concepts that have since been widely used by economists.
This is among the most familiar of all economic laws; so much so that one might be tempted to regard it as a statement of the obvious, but its dissemination by  Alfred Marshal in 1891 <ref> Alfred Marshall The Principles of Economics Chapter 3,  Phoenix Books 1997 (1st edition 1891) </ref> introduced a major departure in economic theory. Previous economists, from Adam Smith to Karl Marx, had taught that prices were determined by the cost of production. (See [[history of economic thought]]).
*'''Consumer's surplus'''  denotes the amount by which consumers value a commodity over above what they have to pay for it.
 
*The '''income effect'''  denotes the fact that the demand for most products increases as consumers' income increases.
 
*The '''substitution effect''' denotes the fact that the demand for a commodity is influenced by the price of close substitutes.
The operation of the law of supply and demand in particular markets may be quantified by the use of the following concepts :
*'''Elasticity''' denotes the change in demand in response to changes of price, income or the prices of substitutes.
*'''[[Elasticity]] of demand''' denotes the change in demand in response to changes of price, income or the prices of substitutes.
*'''[[Consumer's surplus]]'''  denotes the amount by which consumers value a commodity over above what they have to pay for it.
*The '''[[income effect]]'''  denotes the fact that the demand for most products increases as consumers' income increases.
*The '''[[substitution effect]]''' denotes the fact that the demand for a commodity is influenced by the price of close substitutes.
 
These concepts are among the basic tools of [[microeconomics]] and some of their applications are described in the article on that subject. They are applicable to all economic activity and do not depend upon any assumptions concerning the nature of such activity. That remains true  notwithstanding the fact that they can  assume zero or even negative values. The concept of elasticity of demand, for example, is not invalidated by the existence of commodities that are so essential that the demand for them is insensitive to price, nor by the existence of goods that are prized simply because they are expensive.  


The use of the concepts of supply and demand in economic theory is further explained in the article on [[microeconomics]].


==References==
==References==
<references/>
<references/>

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The law of supply and demand is a fundamental law of economics. It can be stated as follows:

  • the quantity of a commodity that consumers are prepared to buy, (normally) rises when the price of that commodity falls,and vice versa;
  • the quantity of a commodity that suppliers are prepared to sell, (normally) rises when the price of that commodity rises, and vice versa; so that,
  • the price at which transactions eventually take place is that at which the quantity that consumers are prepared to buy is the same as the quantity that suppliers are prepared to sell.

(The word "normally" is inserted in recognition of the exceptions noted in the concluding paragraph of this article)

The eventual price at which the hypothetical bargaining settles down is referred to as the market clearing or equilibrium price. Higher prices result in unsold surpluses, prompting suppliers to reduce their prices, and vice versa.


This is among the most familiar of all economic laws; so much so that one might be tempted to regard it as a statement of the obvious, but its dissemination by Alfred Marshal in 1891 [1] introduced a major departure in economic theory. Previous economists, from Adam Smith to Karl Marx, had taught that prices were determined by the cost of production. (See history of economic thought).


The operation of the law of supply and demand in particular markets may be quantified by the use of the following concepts :

  • Elasticity of demand denotes the change in demand in response to changes of price, income or the prices of substitutes.
  • Consumer's surplus denotes the amount by which consumers value a commodity over above what they have to pay for it.
  • The income effect denotes the fact that the demand for most products increases as consumers' income increases.
  • The substitution effect denotes the fact that the demand for a commodity is influenced by the price of close substitutes.

These concepts are among the basic tools of microeconomics and some of their applications are described in the article on that subject. They are applicable to all economic activity and do not depend upon any assumptions concerning the nature of such activity. That remains true notwithstanding the fact that they can assume zero or even negative values. The concept of elasticity of demand, for example, is not invalidated by the existence of commodities that are so essential that the demand for them is insensitive to price, nor by the existence of goods that are prized simply because they are expensive.


References

  1. ↑ Alfred Marshall The Principles of Economics Chapter 3, Phoenix Books 1997 (1st edition 1891)
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