Law Of Supply & Demand
What is meant by the law of supply and demand is that theory that explains how the interaction between the supply of the resource and the demand from the same resource, in addition to how to determine the impact of this interaction on the price of the product or service.
Law Of Supply & Demand
What is meant by the law of supply and demand is that theory that explains how the interaction between the supply of the resource and the demand from the same resource, in addition to how to determine the impact of this interaction on the price of the product or service.
Continue reading the following lines to learn more about the law of supply and demand.
What is the law of supply and demand?
What is meant by the law of supply and demand is that theory that explains how the interaction between the supply of the resource and the demand from the same resource, in addition to how to determine the impact of this interaction on the price of the product or service.
In general, lower supply and higher demand lead to an increase in prices.
On the other hand, as supply increases and demand decreases, the price tends to go down.
The law of supply and demand connects many economic principles. Supply and demand are two factors that work against each other until the market reaches an equilibrium price.
Equilibrium price means the price at which the producer can sell all the units he wants to produce, and the buyer can buy all the units he wants.
Example: If a smartphone company develops a new phone and sets the retail price at $1,000.
The company did not find that the number of customers that it expected had purchased, the company will start here to reduce the price that it set previously, until the number of customers increases, if the number of customers here exceeds the limit that the company expected, then the company must raise the price of its product again, when it balances The demand for an item with the supply of that product, the market is in equilibrium.
There are many factors affecting the law of supply and demand with regard to goods and services.
We find that production capacity and production costs such as labor, raw materials and the number of competitors control the amount that companies can produce.
Supply is also affected by the time factor, which requires suppliers to respond quickly to changes in the volume of demand for the product and thus its price.
The concept of supply and demand can go beyond the mere buying and selling of commodities to describe various behaviors in economics.
For example, when unemployment is high, employers can offer lower salaries; Because the demand for labor is higher than the supply of available jobs.
When the situation reverses, employers have to offer higher salaries to attract employees.
Supply and demand curve
Economists generally combine the relationship between the quantities that producers are willing to produce and price in an equation called the supply curve.
The higher the price, the more likely the production.
Conversely, buyers tend to buy more products as their price decreases, and this is called the demand curve.
At the supply curve, and as the price rises, producers’ profits rise, and this prompts them to increase production to achieve more profits.
This also leads to new producers entering the market and producing this type of goods or services in order to make profits.
This results in the production of more commodities than the equilibrium quantity in the market, which causes a depression and a significant fall in prices.
In many cases, this leads to recession and an economic crisis that many producers cannot bear, especially if they are small producers, who may be exposed to bankruptcy and exit from the market.
After that, the quantity of the commodity decreases again in the market, leading to achieving the intersection between the equilibrium price and the equilibrium quantity again.
Importance of law of supply and demand
The law of supply and demand is an important concept for economic activity.
Supply and demand are two economic forces that influence each other and both are important to the economy because they affect the prices of consumer goods and services within the economy.
As previously mentioned, when the supply becomes equal to the demand, the market reaches the equilibrium point and achieves the equilibrium price.
The equilibrium price of the goods or services offered ensures that the quantity of resources supplied is equal to the number of resources demanded.
The price that is determined at this point is the ideal price that is commensurate with the interest of the producer and the consumer or the seller and the buyer.
This ensures that companies do not produce too much or too little.
Economists and companies constantly analyze the relationship between supply and demand when making strategic product decisions and moving the market and prices.
The market economy considers that the law of supply and demand is one of the best determinants of economic growth and prosperity.
The relationship between supply and demand supports total production in any country and contributes to its development and regulation.
When studying the demand and supply curves, knowing the most demanded products in a country’s market, and knowing the most available products for offers.
Production companies will strive to produce more of them.
Which leads to supporting the overall economy, improving skills, confronting unemployment, and supporting factors of production.
All of these things lead to the development of the economy in general.
Supply and demand determinants
Supply determinants differ from demand determinants. Follow the following lines to learn about each in more detail.
Determinants of demand: One of the first determinants of consumer demand for a particular commodity is the price, as it is the main determinant of demand.
The purchase decision depends entirely on the price and the changes that occur to it. The second factor is income.
The relationship between income and demand is a direct relationship. The higher the income, the greater the demand for goods.
And services, and if income decreases, demand decreases. This only happens until a certain point during which the loss of desire interferes with the increase in income.
The consumer reaches with time the stage of losing the desire to obtain any new quantity of the commodity, regardless of his income.
Among the factors determining demand are also the prices of commodities and services that are complementary or similar to the commodity or service in question.
The relationship here is inverse between the demand for the commodity and the price of the commodity that complements it, and the relationship is direct between the demand for the commodity and the price of the substitute commodity.
Supply determinants: One of the determinants of supply is the taxes imposed on goods and services.
The higher the taxes imposed, the producers will try to reduce the tax due on them by reducing production, which leads to a reduction in supply.
The prices of substitute commodities also negatively affect the supply of the commodity, because if the price of the substitute commodity increases, producers will stop producing their commodity and will seek to produce the substitute commodity because its price has become higher, which means an increase in their profits.
The prices of productive materials are also considered determinants of supply, as the high prices of productive materials that are involved in the production of goods, products, and services lead to an increase in the cost of producing those goods and services.
Here, the supply of these products will decrease due to their lack of production due to the high prices of the productive elements.
