Supply and demand are the basic and most essential concepts of economics. They provide the stamina of a market in an economy. Demand is a term used to describe the amount of commodity or service needed by buyers in the market. It refers to the quantity of a commodity or service individuals are willing and able to pay for at specific price. The relationship between quantity and price is known as demand relationship. On the other hand, supply refers to the total amount of good a market is willing to offer to consumers (Gale, 2005).
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The quantity supplied in a given market refers to the total amount a particular producer of a good is willing to provide at a particular price (Gale, 2005). Supply relationship refers to correlation between price and the quantity supplied in the market. From this explanation, it is clear that price provides reflection of these two items in a market. The relationship between supply and demand lies on the forces of resource allocation. In any market economy, demand and supply theories try to allocate resources in the best and most efficient and effective manner. In addition, there is some similarity in elasticity of both supply and demand as it will be explained below.
The law of demand
The law of demand states that, the higher the price of a commodity, the lower the demand of that product provided all that factors are equal and constant (Hildenbrand, 2013). The buyers will not be willing to buy goods at high prices (Hildenbrand, 2013). The total amount of goods that consumers buy at higher prices is lower because when the price of a commodity increases so does the opportunity cost increase.
People will avoid purchasing a good that forces them to give up on the consumption of another product they value more. Demand curve demonstrates the negative relationship that exists between the quantity demanded and price. The higher the price of a product and service the lower the demand. Demand will be high when the price is low.
Law of supply
The law of demand corresponds to the law of supply because it illustrates the quantity of a product that will be sold at a particular price (Chatnani, 2010). Supply curve of a good under this law is upward sloping. This indicates that the higher the prices the higher the quantity of goods and services suppliers will be willing to supply (Chatnani, 2010). Producers are willing to increase the supply of their product at higher prices because selling higher quantity at this price increases their revenue.
How law of supply corresponds to law of demand
For any market to function well, producers must supply goods and services that are required by the consumers. This is what is called law of demand and supply. Supply refers to the total amount of goods a market can produce while demand refers to the total amount of products buyers are willing and able to purchase. Combination of these two market forces forms the unique and main principle that underlies economic theory (Chatnani, 2010). The law of both demand and supply explains the manner in which prices are set in order to sale goods.
This process begins with consumers first demanding goods. When there is high demand for a particular product in the market, the producer can charge higher price. In this situation, producers are motivated by the possibility of earning huge profits because of the prevailing high prices. They increase their supply with the purpose of meeting the level of demand in the market (Chatnani, 2010). However, the law of demand explains that the higher the prices the lower the number of consumers will able to buy the goods. Therefore, demand will go unmet. In order to meet the level of demand, the producer should charge a fair price that will result to sale of the required amount while generating substantial profit.
Producers should not take advantage of the high level of demand to exploit consumers by charging high prices. For example, a cell phone manufacturing company observes huge demand of new cell phones in the market. Due to this demand, the company is motivated to invest in research in order produce that phone (Mankiw, 2009). The company then produces 6000 units and puts them in the market for $400 for each cell phone. Some consumers will find it affordable and pay the full $400 and almost half of the stock will be sold.
However, some consumers will consider the price high hence they will not be willing to pay. Since the price is high, the sales will start to decrease (Mankiw, 2009). Many consumers will still be in need of the phone but unwilling and unable to pay the required price of $400. The company will start losing money because of the unsold stock. The company will be forced to reduce the price of the cell phone to $300 with the hope of increasing sales. Due to this reduction, consumers will start purchasing the phone. However, some consumers will not be willing to pay that amount. This will force the company to further reduce the price to increase sales.
This process will continue until the producer and the consumer agrees on a certain fair price. This price will be able to meet the demand of the consumer as well as maximize the company’s profit (Mankiw, 2009). The agreed price is called the market-clearing price. When there is balance in supply and demand, the market is considered to have reached equilibrium. At this equilibrium point, resources are used efficiently. The study in economics is largely based on how the market can achieve equilibrium. This is why economists spend most of their time in analyzing the link between demand and supply (Mankiw, 2009).
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Another correspondent in these two laws is that they are affected by price elasticity. The extent to which demand and supply curve reacts to any change in price is known as the curve’s elasticity. Different products have different elasticity. This is because some products are more essential to consumers (Gale, 2005). Necessity products are not sensitive to change in price. The reason behind this is that consumers will continue to purchase these commodities despite price increase. Increase in the price of products that are not necessity goods will discourage consumers from purchasing them. This is because the opportunity cost of purchasing them will increase. Therefore, these products are sensitive to increase in price.
Goods are considered highly elastic if minimal change in price causes sharp change in quantity supplied of demanded. However, these types of products are available in the market and consumers may not be in need of them. Inelastic good is one in which price change leads to moderate change in the amount supplied or demanded in the market. Goods that portray this kind of elasticity tend to be the necessity goods. Consumers usually need these goods in their day-to-day activities (Gale, 2005). There is no way consumers can avoid these goods. Researchers formulated a unique formula of determining elasticity of demand and supply curves. The following is the equation used in determining the elasticity of these curves.
Elasticity = (percentage change in quantity divided by percentage change in price).
If the calculated elasticity is greater or equivalent to one, the curve said to be elastic. If the value is less than one the supply or the demand curve is said to be inelastic. Therefore, elasticity is a common aspect of both demand and supply (Working, 2007). From the above explanation, it is clear that the demand curve has a negative slope. The demand curve will look flatter of more horizontal if there is huge decrease in quantity demanded with small increase in price. The curve being flatter means that the commodity in question is elastic.
On the other hand, inelastic demand is demonstrated by a more upright curve. This implies that there is little change in quantity demanded with a huge change in price. Elasticity of supply works in the same manner as elasticity of demand. If small change in price leads to large change in total amount supplied, the supply curve will be flatter. If the good in question exhibits this kind of change, then it is referred to as elastic. In this case, elasticity will be greater of equal to one. If a huge change in price leads to small change in quantity supplied, the supply curve will be steeper. In this case, elasticity will be less than one.
From the above explanation, it is clear the law of demand corresponds to the law of supply. Their behavior is what makes them correspond. Both aim at allocating resources in a more efficient and effective manner. The interaction of supply and demand determines market-clearing price. This price is achieved when both supply and demand are at equilibrium. Equilibrium implies that the quantity of demanded for any product by buyers is equal the quantity supplied by suppliers.
Market equilibrium will continue to prevail despite external factors like externalities. If there is disequilibrium in the market, where the quantity supplied is not equal to the quantity demanded, certain forces would act on demand and supply forcing them to move to equilibrium. Another aspect is the price elasticity. Both demand and supply curves face price elasticity. Price elasticity is used to indicate the degree in which demand and supply curves change as result of price and quantity change.
Hildenbrand, W. (2013). On the” law of Demand”. Econometrica: Journal of the Econometric Society, 997-1019.
Working, E. J. (2007). What Do Statistical” Demand Curves” Show?. The Quarterly Journal of Economics, 212-235.
Chatnani, N. N. (2010). Commodity markets: Operations, instruments, and applications. New Delhi: Tata McGraw Hill Education Private Limited.
Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western Cengage Learning.
Gale, D. (2005). The law of supply and demand. Mathematica scandinavica, 3(1), 33-44.