Demand and Supply Curve

Demand is an economic term that refers to what consumers are prepared and able to buy. It signifies the relationship between the range of prices of a given product and the quantities customers will buy at every price. In a demand relationship, price is the independent variable while quantity demanded at each price is the dependent variable. To find out the connection between the two variables, economists assume that all factors affecting quantity demanded and price remain constant (ceteris paribus). This relationship shows that there is an inverse correlation between the product’s quantity demanded and its price (Henderson, 2009).

Demand curve is a graph like the one shown below that shows possible combinations of prices as well as quantities of a demanded product. Price which is the independent variable is normally on the vertical axis, whereas the quantity demanded which is the dependent variable is placed on the horizontal axis. It differs from convention mathematics; where dependent variable is place on the vertical axis while the independent variable on the horizontal axis. The demand curve downward slope reflects the law of demand; which means an increase in the price of the product decreases the quantity demanded and vice versa. A change in the cost of a commodity produces a movement along the demand curve. The demand curve characterizes customers desire to purchase a specific sold by a specific firm. Market demand curve shows the correlation between the quantities of a product demanded by all customers at its price, ceteris paribus (Henderson, 2009).

The demand of any product can either be price inelastic, unitary inelastic or price elastic by the slope of the demand curve. A demand curve that has a small negative slope is referred as elastic which indicates that a given increase in the price of the product leads to a disproportionate fall in the quantity demanded for instance products that have a lot of substitutes such as LCD TVs. A curve with a high negative slope is said to be inelastic, which indicates that raising the price leads to a little change in quantity demanded a good example include goods that have few substitutes such as petrol. A change in the quantity of a product demanded at any given product represents a shift in the demand curve which can either be an increase or a fall in demand. An increase in demand indicates that consumers are demanding for large quantities of a certain product at any given price than before. While a fall in demand indicates that consumers are demanding lesser quantity of a certain good at any given price than before. Economists have identified factors that cause a shift in the demand of any product and include; changes in income, tastes, population, expectations and change in price of related goods

Demand curve

Price

Supply Curve

Supply curve is a graphical representation of how much products or service people are will to sell at any give price. When a price of a certain commodity changes, the quantity supplied moves in the same direction. Therefore, there is direct correlation between price and the quantity supplied when all other factors are kept constant (ceteris paribus). The supply curve is normally positively sloped, which is in line with the law of supply. An increase in price encourages businesses to increase its production by hiring more workers and buying more raw materials and the vice versa (Cachon & Terwiesch, 2012).

A movement along the supply curve represents the change in the quantity supplied of a product that is a result of change in its price. Just like in the demand curve, a change in supply schedules results in a shift of the supply curve. That is a change in the quantity consumers’ demand at any given price. A supply curve can either shift to the right or to the left. A shift to the right side represents an increase in supply, meaning people will supply larger quantities of a product at any given price than before. On the other hand, a shift to the left side represents a decrease in supply. This means that people will supply less quantities of a particular product at any given price than before. Economists argue that shifts in the supply curve occurs as a result of four key factors namely, changes in input prices, change in expectations, change in the number of suppliers and changes in technology (Cachon & Terwiesch, 2012).

The price that equals the quantity demanded and the quantity supplied is referred to as the equilibrium price. The simplest way to determine the equilibrium quantity and price in any market is combining the demand curve and the supply curve to be on the same graph. Since the demand curve represents the quantity demanded at any given price whereas the supply curve shows the quantity of products or services supplied at any given price, the point at which the supply and demand curves crisscross is the equilibrium point (Cachon & Terwiesch, 2012).

References

Cachon, G. & Terwiesch, C. (2012).Matching Supply with Demand: An Introduction to   Operations Management, New York: McGraw-Hill/Irwin.

Henderson, H. (2009) Supply and Demand, Charleston: BiblioBazaar.

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