Premium Essay

Law of Demand , Law of Supply, and Equilibrium

In: Other Topics

Submitted By Veronicafranco81
Words 2410
Pages 10
Supplemental Unit 1. Demand, Supply, and Adjustments to Dynamic Change
Note: The authors recommend that this feature be read along with Part I, Elements 6, 7, and 11 of Common Sense Economics.
Common Sense Economics highlights how markets work and their impact on the allocation of resources. This feature will investigate this issue in more detail. It will use graphical analysis to analyze demand, supply, determination of the market price, and how markets adjust to dynamic change.

Demand
The law of demand states that there is a negative relationship between the price of a good and the quantity purchased. It is merely a reflection of the basic postulate of economics: when an action becomes more costly, fewer people will choose it. An increase in the price of a product will make it more costly for buyers to purchase it, and therefore less will be purchased at the higher price.
The availability of substitutes—goods that perform similar functions—underlies the law of demand. No single good is absolutely essential; everything can be replaced with something else. A chicken sandwich can be substituted for a cheeseburger. Wheat, oats, and rice can be substituted for corn. Going to the movies, playing tennis, watching television, and going to a football game are substitute forms of entertainment. When the price of a good increases, people will turn to substitutes and cut back on their purchases of the more expensive good. This explains why there is a negative relationship between price and the quantity of a good demanded.
Exhibit 1 provides a graphic illustration of the law of demand. Price is measured on the Y-axis and quantity on the X-axis. The demand curve will slope downward to the right, because when the price falls, consumers will purchase a larger quantity.
Correspondingly, an increase in price will cause buyers to reduce the quantity of their...

Similar Documents

Premium Essay

Economics Problems Set 1

...MBA-FP6008: Assessment 1, Economics Problem Set 1 Dennis J. Johnson Capella University 08/12/2015 Problems A, B, and C Introduction This assessment will be an analysis of graphed data and changes in supply and demand for three economic problems. Problem A involves production possibilities for consumer and capital goods, problem B is an evaluation of changes in supply and demand equilibrium, and finally, problem C involves pricing with relevance to supply and demand. Successful completion of this assessment demonstrates proficiency in; applying theories, models, and practices of economic theory, analyzing solutions with support from relevant data, resources, references, and economic principles, analyzing graphed and circular flow diagram data, and analyzing changes in supply and demand in a competitive market. Problem A. Production Possibilities | Type of Production | Production Alternative A | Production Alternative B | Production Alternative C | Production Alternative D | Production Alternative E | Butter | 0 | 1 | 2 | 3 | 4 | Guns | 15 | 14 | 12 | 9 | 0 | Production Possibilities for Consumer Goods (Guns) and Capital Goods (Butter) 1. The specific assumptions that underlie the production possibilities curve are: that there are only two goods, consumer and capital, that they are produced in different proportions in the economy, the quantities of the resources do not change, production techniques are given and constant, and that resources......

Words: 1353 - Pages: 6

Premium Essay

Huila

...Supply and demand 1. Demand and factors influencing it. The law of demand Demand is an economic category, which characterizes the requirement of buyers for a particular product, provided with sufficient means of payment that allows you to purchase the goods at a certain price in a given time period for a particular market or in a particular country. Distinguish individual and aggregate demand. Individual demand is the demand of a specific buyer on a specific product, and in this market. Aggregate demand is the total demand for goods and services in any country. Also there are primary and secondary demand. Primary demand is demand for the product or services a specific category of goods in General. For example, it may be the demand for coffee or the demand for insurance services. Secondary (or selective) demand is the demand for goods of a certain brand or company for services of a certain type. Additionally, the demand is negative, the absent, the latent (potential), full, over, falling (falling), the fluctuating, irrational, rush (avalanche). Negative demand is the demand that occurs in cases when consumers "dislike" the product and avoid its purchase. The missing demand is the demand for the goods that are unnecessary in the market or obsolete. Latent demand is the demand expected in the future, the demand of potential buyers. Full demand is the desired demand exactly the relevant production possibilities and policy of the manufacturer of the product or service. Excessive......

Words: 2230 - Pages: 9

Premium Essay

Market Equilibrating Process Paper

...“Market equilibrium is a situation where the supply is equal to the demand”. The goal of many organizations is to create and continue to create market equilibrium. In this paper market equilibrating, law of supply and demand and inelasticity vs. elasticity will be furthered discussed. Law of Demand and the Determinants of Demand The quantity demanded falls when the price increases. Whereas, the quantity demanded rises when the price falls. According to McConnell, Brue and Flynn (2009), “Demand is a schedule or curve that reveals the various amounts of a product that consumers are willing to purchase at each of a string of potential prices during a specified period of time. Various prices are selected for a particular product in different quantities for the product. The law of demand is the correlation between the demand of quantity and price. For example, a designer coat is retailed for $200 at a department store in the early winter season. During an after Christmas sale, the coats are reduced by 50% to a cost of $100. This sale created more consumer purchases because the price was reduced. As the price went down, more consumers purchased the shoes. The law of demand was utilized throughout this sale process. Law of Supply and the Determinants of Supply The supply of a product within a specific time frame includes various prices for the particular product. When the quantity of supply increases then the price decreases. Whereas, when the quantity of supply......

Words: 725 - Pages: 3

Premium Essay

Market Equilibration

...market equilibrium is maintained. It is essential for mangers to know how to apply economic principles, specifically supply and demand, to everyday business decisions. In this paper I will describe several economic concepts, such as market equilibrium, supply and demand, and apply their relationship to a real world event. Market Equilibrium Market equilibrium is a very important concept in the study of economics. “Market equilibrium is a market state where the supply in the market is equal to the demand in the market (“Market Equilibrium in Economics,” 2015).” Often times the market is not in equilibrium, meaning that the quantity supplied does not equal the quantity demanded from consumers. When this occurs it creates shortages or a surplus of goods. A surplus happens when there is excess supply or the quantity supplied is greater than the quantity demanded. A shortage occurs when there is excess demand or the quantity demanded is greater than the quantity supplied (“Market Surpluses & Market Shortages,” 2006). Ultimately, the concept is derived from the laws of supply and demand, which will be discussed in the following paragraphs. Supply “Supply is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period” (McConnell, Brue, & Flynn, 2009, p. 41). It is important for business managers to know the importance of the law of......

Words: 814 - Pages: 4

Premium Essay

Market Equilibration Process Paper

...applicable even to everyday life. For business managers is essential to be aware of laws of demand, supply, and equilibrium to grow their business. Examples of the mentioned laws are abundant in the daily ground, and by recognizing and exploring them people can learn by observations. The author will discuss the market equilibration process based on example that everyone can relate to – food. Law of demand Demand is how much consumers are willing to pay for a good or service in particular period. The demand relationship is showing the interdependence between quantity and price. For instance, if the cost for exotic fruits is relatively low, consumers will be willing to purchase more kilograms. On the contrary, side if fruits that are imported in the country are expensive, the buyers are likely to buy just a few as for the remaining sum they will fill in their basket with local fruits. The inverse relationship between demanded quantity and price is defined by McConnell, Brue, and Flynn (2009) as law of demand; it is shown on graph 1. Graph 1. Relationship between demanded quantity and price Law of supply Supply is how much of a good or service the market can offer for a certain cost. The law of supply is the relationship between price and quantity supplied. The graph representing the law of demand has a downward slope. Opposed to it, graph 2 that shows the interdependency between supplies and cost has upward slope representing that the cheaper units are, the......

Words: 775 - Pages: 4

Premium Essay

Disequilibrium Ppt

...content items are expected to be developed: • The paper/presentation includes specifics about Law of Demand and lists main determinants of demand, Law of Supply and lists main determinants of supply. The basic determinants of demand are (1) consumers’ tastes (preferences)- a change that makes the product more desirable—means that more of it will be demanded at each price. Demand will increase; the demand curve will shift rightward. An unfavorable change in consumer preferences will decrease demand, shifting the demand curve to the left., (2) the number of buyers in the market,- An increase in the number of buyers in a market is likely to increase product demand; a decrease in the number of buyers will probably decrease demand. (3) consumers’ incomes,- For most products, a rise in income causes an increase in demand. (4) the prices of related goods,- A change in the price of a related good may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a complement: and (5) consumer expectations- Changes in consumer expectations may shift demand. A newly formed expectation of higher future prices may cause consumers to buy now in order to “beat” the anticipated price rises, thus increasing current demand. • The paper/presentation explains how equilibrium and disequilibria (surplus and shortage) occur on the market. - The equilibrium price (or marketclearing price ) is the price where the intentions of buyers and......

Words: 1376 - Pages: 6

Premium Essay

Market Equilibrium Process

...Market equilibrium is a circumstance in which the quantity of merchandise or services demanded by consumers is equivalent to the quantity supplied by sellers (McConnell, Brue, & Flynn, 2009). The purpose for this paper is to relate the concept of the market equilibrating process to a previous real-world occurrence happening in a free market. The market equilibrating process will be clarified and the following components will be considered in the clarification; law of demand and determinants of demand, law of supply and determinants of supply, efficient markets theory, and the surplus and shortage. Law of demand and determinants of demand Demand is a schedule or a curve that illustrates the assorted quantity of a product that consumers are willing and able to acquire at each of a sequence of probable costs during a specific period (McConnell, Brue, & Flynn, 2009). As price falls, the quantity demanded ascends and as the price rises, the quantity demanded drop. The affiliation among the price and quantity demanded is labeled an inverse affiliation and this Economist call the law of demand. The determinants are the -other things equal- consumers’ preferences, the number of consumers in the market, buyers’ income, the cost of similar goods, and buyer expectations. An example could be the sale of Jordan sneakers. The manager of a chief department store retails Jordan’s for $120 usually, but during their back-to-school sale, the Jordan’s were reduced by 20% making them......

Words: 661 - Pages: 3

Premium Essay

Economic Conceptsmmpbl501Uofphoenix

...501/ Forces Influencing the 21st Century Mr. Frank Kingsland May 21, 2011 |Concept |Personal Example |Reference to Concept in Reading | | | | | |Microeconomics |In the natural gas market, gas is in supply all year round. |Microeconomics is a measure of | |The branch of economics that analyzes the |Natural gas to heat people’s homes is in increases in demand |specific economic units, which are an | |market behavior of individual consumers and|in the winter time. The supply could eventually run low |individual industry, firm, or | |firms in an attempt to understand the |depending upon where Shell gets its gas from. Natural gas is |household. | |decision-making process of firms and |in less demand in the summer time. There is no control over if| | |households. It is concerned with the |the price of a therm may go up anytime with People’s Gas. I |We measure | |interaction between individual buyers and |worked for Just Energy for one week last year in June and quit|The price of a specific product, the | |sellers and the factors that influence the |because they wanted to charge......

Words: 2775 - Pages: 12

Premium Essay

Economics

...one goods against another. In economics a resource is said to be scarce when the available resource cannot fulfill the demand. Thus there is scarcity because there is a limited supply of resources. Opportunity cost on the other hand means the amount of goods and services must be given up to get something. The opportunity cost of some decision is the value of the next best choice that must be foregone because of that decision. So the value of the best alternative not accepted is the opportunity cost. The cost of pursuing one choice instead of another is called opportunity cost. For instance, if a person has $1,000 and he invests it in stock of company A, he foregoes the opportunity of investing in the stock of company B. Opportunity cost may also be in terms of non-financial costs like time lost or any other non-monetary gain foregone. The demand and supply in the law of demand and supply should first be understood. Demand refers to the quantity of goods and services people are willing to buy at a particular price. On the other hand, supply is the quantity of goods and services the market can offer at a particular price. The law of demand says if all factors remain the same, the higher the price of the good, the less people will demand the good. This means that higher the price the lower will be the quantity demanded. On the other hand, the law of supply says that higher the price of the product, the higher will be the quantity supplied. In other words, the higher the......

Words: 737 - Pages: 3

Premium Essay

Busniess Micro

...Youssef Supply and demand One of the most basic concepts of economics is Supply and Demand. These are really two separate things, but they are almost always talked about together. Supply is how much of something is available. For example, if you have 9 baseball cards, then your supply of baseball cards is 9. If you have 6 apples, then your supply of apples is 6. Demand is how much of something people want. It sounds a little bit harder to measure, but it really isn't. To measure demand, we can use a very simple numbering system, just like the supply one. If 8 people want baseball cards, then we can say that the demand for baseball cards is 8. If 6 people want apples, then we can say that the demand for apples is 6. Is supply and demand from the key concepts of Economics, is the backbone of a market economy, Where the application refers to first kilometers (quantitative) for a product or service that is requested by the buyer. And quantity is the quantity that the superpower individuals willing to purchase being saturated needs and desires, for a given price. And the relationship between the price of the product and the quantity of the product to be purchased. The offer represents a market which offers kilometers available quantity indicating the amount of a certain commodity, Where producers are willing to supply. The relationship between price and service or product provided to figure out the relationship and the price is a reflection of supply and demand. * The Law......

Words: 758 - Pages: 4

Premium Essay

Who Blah

...Question One: If the demand for and supply of DVD players increased simultaneously, we could confidently predict an increase in the price of DVD players: | True | | | False | | Price will become indeterminate but quantity sold will increase.  Please refer to page 60-61 of the textbook. Question Two: 'Because of unseasonably cold weather, the supply of oranges has substantially decreased.' This statement indicates that: | consumers will be willing and able to buy fewer oranges at each possible price | | | the equilibrium quantity of oranges will rise | | | the amount of oranges that will be available at various prices has declined | | | the price of oranges will fall | | The unseasonably cold weather has resulted in fewer oranges being supplied.  The main factor is the unseasonal weather resulting in a decrease in supply shown by a leftward shift in the supply of oranges. Question Three: A decrease in the quantity of Mars bars demanded due to an increase in price involves: | a. a shift of the demand curve for Mars bars to the right | | | b. a shift of the demand curve for Mars bars to the left | | | c. a movement upward and to the left along the demand curve for Mars bars | | | d. a movement downward and to the right along the demand curve for Mars bars | | Supply and Demand shows that once the price rises of an object less of that object is demanded.. but once the price is lower more of the product is......

Words: 1958 - Pages: 8

Premium Essay

Simple Outline of Supply and Demand

...The Market forces of Supply and Demand Supply and Demand * are the two words that economists use most often. * are the forces that make market economies work. * Terms refer to the behavior of people . . . as they interact with one another in markets. Modern microeconomics is about supply, demand, and market equilibrium. * Buyers determine demand, Sellers determine supply. Market is a group of buyers and sellers of a particular good or service. * Competitive market -is a market in which there are many buyers and sellers so that each has a negligible impact on the market price. Competition: Perfect and Otherwise * Perfect Competition * Products are the same * Numerous buyers and sellers so that each has no influence over price * Buyers and Sellers are price takers * Monopoly * One seller, and seller controls price * Oligopoly * Few sellers * Not always aggressive competition * Monopolistic Competition * Many sellers * Slightly differentiated products * Each seller may set price for its own product Demand * Quantity demanded is the amount of a good that buyers are willing and able to purchase. * Law of Demand * The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises. The Demand Curve: The Relationship between Price and Quantity Demanded * Demand schedule is a......

Words: 818 - Pages: 4

Premium Essay

Market Equilibration Process

...Demand and Supply for DVD rental Fernando Miller ECO/561 4 November 2014 Saeed Tabriz Demand and Supply for DVD rental Introduction Purpose/Objective Background: The purpose of this paper is to provide real world experience using DVD rental market as well as to conduct analysis with examples of Demand and Supply. Element to consider in this paper are the laws of demand and supply and determinant factors; economic efficient markets and surplus and shortage. Market Conditions: DVD rental are slowly becoming outdated as demand for this product dwindles. Attributing factors broad about a shift in the supply and demand conditions may be attributed by new technological developments (supply) that has introduce other mediums (demand preference) of providing this type of entertainment service. Demand for this type of product is currently fulfilled by businesses such as Amazon, Netflix and Redbox who currently host the biggest market share for this type of product. Law of demand and determinants: McConnell (2009) defines the Law of Demand as “Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.” This law establishes an inverse relationship between price and quantity demanded (McConnell 2009). Determinants of demand are consumer factors that shift the demand curve factors such as income (increases and decrease), preferences (consumer choices), and number of buyers (increase or decrease). Price...

Words: 854 - Pages: 4

Premium Essay

Market Equilibration Process

...Market Equilibration Process Having equilibrium in the market is the same as having equilibrium in our daily activities. Economic equilibrium is “a condition or state in which economic forces are balanced. It can also be defined “as the point where supply equals demand for a product – the equilibrium price is where the hypothetical supply and demand curves intersect” (Investopedia, 2013). It is important to understand supply and demand of a product in order to find equilibrium. In today’s market, consumers are usually weary about purchases of large items due to the fact there are many competitors competing for the same potential customers. Could you live without the internet, cell phone, microwave, television, or any other electric technologies? Law of Demand and Supply The world today have grown to rely heavily on technology, especially the cellular phones, in their daily activities. “The average U.S. household today owns at least 23 consumer electronic products” (Get Energy Active, 2011). As the technology in cell phones changes, consumers are eager to purchase the latest styles whether for practical uses or to be consider part of the “in crowd”. Suppliers uses this information in researching and to appropriately distribute the products and services by applying the laws of demand and supply. The law of demand is when “supply is held constant, an increase in demand leads to an increased market prices, while a decrease in demand leads to a decreased market price”......

Words: 836 - Pages: 4

Premium Essay

Eco 365 Week 2 Paper

...Microeconomics and the Laws of Supply and Demand The Laws of Supply and Demand The laws of supply and demand are detrimental to our economy today. It is what actually drives our market economy. Buyers determine the quantity produced of a particular product based on their demand for that product and the price he or she is willing to pay for it. Supply is then created by producers when and if they are willing to accept the current rate for which they will get from production of that product. At the end of the day, price is what drives supply and demand. “The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more” (Heakel, 2014). “Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue” (Heakel, 2014). The simulation......

Words: 1240 - Pages: 5