Microeconomics
Understanding Supply and Demand
At the heart of every business endeavor is an exchange between a buyer and a seller. The buyer recognizes that he or she has a need or wants a particular good or service and is willing to pay a seller to obtain it. The seller wants to participate in the process because of the anticipated financial gains from selling the good or service. So, the exchange process involves both demand and supply.
Demand refers to the willingness and ability of buyers to purchase goods and services at different prices.
Supply refers to the willingness and ability of sellers to provide goods and services for sale at different prices.
The Demand Curve
Because most people typically have unlimited wants and limited financial means to acquire them, demand is driven by a number of factors that influence how people decide to spend their money, ranging from an item’s price to quality of life decisions.
As the price of a good or service goes up, people buy smaller amounts. So, as prices rise, quantity demanded falls. At lower prices, consumers are generally willing to buy more of a product. A demand curve is a graph of the amount of a product that buyers will purchase at different prices. The demand curve typically slopes downward, meaning that lower and lower prices attract larger and larger purchase.
The Supply Curve
Just as consumers must make choices about how to spend their incomes, businesses must also make decisions about how to use their resources to obtain the best profits. When looking at supply, a number of factors and economic indicators affect the available quantities of goods in the marketplace.
Sellers would prefer to command a high price rather than a lower price for their offerings. A supply curve graphically shows the relationship between the different prices and the quantities that sellers will offer for sale, regardless of demand. Movement along the supply curve is the opposite of movement along the demand curve. As a price rises, the quantity that sellers are willing to sell rises, so the supply curves upward.
How Supply and Demand Interact
Separate shifts in demand and supply have obvious effects on prices and the availability of products. In the real world, changes do not alternatively affect demand and supply. Several factors often change at the same time – and they keep changing. Although change can be constant, the point at which the two curves meet identifies the equilibrium price, or the prevailing market price at which you can buy an item. If the actual market price differs from the equilibrium price, buyers and sellers tend to make economic choices that restore the equilibrium level.
Supply and Demand Self-Assessment
Question
OPEC nations have agreed to increase oil production, the major ingredient in gasoline for your cars and trucks. As a result, the price of crude drops $2.00 a barrel.
Choose all of the following that would apply:
a. The supply curve moves to the rightAnswer
a, The supply curve moves to the right; c, Quantity demanded increases; d, There is no change/movement of the demand curve; and f, The price of gas at the pump will decrease.
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