What is the Supply and Demand Theory ?
Supply and demand is perhaps one of the most fundamental concepts of economics. Supply and demand is the backbone of a market economy. Demand refers to how much of a product or service is wanted by buyers. The amount demanded is the amount of a product people are willing to buy at a certain price. There is a relationship between price and demand and that is called the demand relationship. Supply represents how much the market can offer or is willing to produce. The quantity supplied is the amount of a certain good producers are willing to make when receiving a certain price for the product. The relationship between price and how much of a good or service is available to the market is known as the supply relationship. Therefore the thing that is affected by supply and demand is the price.
In a market economy, demand and supply say how resources will be used in the most efficient way.
How Are Prices Determined ?
When supply and demand are in balance it is called "equilibrium". If less products are produced, to ration the shortage, consumers would have to pay a higher price in order to get the product they want. Producers ask for a higher price in order to produce more products. Companies raise prices to try to keep supply and demand in balance and to potentially achieve equilibrium.
In a market economy, demand and supply say how resources will be used in the most efficient way.
How Are Prices Determined ?
Price is based on the interaction of supply and demand. When buyers and sellers can agree on a price the selling occurs and the price is called the "equilibrium price"
When supply and demand are in balance it is called "equilibrium". If less products are produced, to ration the shortage, consumers would have to pay a higher price in order to get the product they want. Producers ask for a higher price in order to produce more products. Companies raise prices to try to keep supply and demand in balance and to potentially achieve equilibrium.
If there is a surplus of a product, the producers would have to lower their prices in order to clear excess supplies. Buyers would be tempted by the lower prices to increase their purchases. The prices will continue to fall until supply and demand are again in equilibrium.
A market price is not a fair price to everyone. It does not guarantee satisfaction of neither the buyer and seller. Prices that are too low will result in attracting competition. Likewise sellers are also considered to be profit maximize-rs. Too high a price will attract additional producer competition. Therefore, there will exist different price levels where individual buyers and sellers are satisfied and the total will create an equilibrium price.When either demand or supply changes, the equilibrium price will change.
Supply and Demand
Supply and Demand
The above chart shows the relationship between supply and demand. The red line shows that as the supply increases, the price decreases. The company has an excess of products and will continue to lower their prices in order to persuade the consumers to purchase the product. The blue line shows how as the supply decreases, the price increases along with it. If more people want the product the company will raise the prices in order to try to make a profit on the product.
The constant raising and lowering of prices is all an attempt of the producer to achieve equilibrium.
Market for I-Phone
Based on the above chart you could see that the equilibrium price of of the phones between demand one and demand two no longer existed as the demand increased and the price decreased. The more the i-phone was in the demand the lower the prices remained. When the i-phone was not in demand the prices went back up to $500. Something that can explain the shift in pricing could be that a competing company released a phone which is similar with a comparable price. As the demand changes there is no longer and equilibrium price.
