8.1 Application of Demand and Supply Analysis

Supply and demand is a fundamental concept in economics. The basic theory states that the market mechanism of supply and demand will result in an equilibrium price for a good or service such that there will be equilibrium between the cost of the good as well as the benefit of the good to consumers. Economists who believe in perfect market believe that the market will determine the optimum output of all goods and prices are left free to fluctuate.

Concept of Demand

An individual demand refers to the quantity of a good a consumer is willing to buy and able to buy at all prices within a period of time It refers to both the ability to pay and a willingness to buy quantity of good or service at appoint on time. Demand is sometimes called effective demand. Demand can be shown by a demand schedule which shows the maximum quantity demanded that is willing & able to buy at all prices. It is a flow concept.

The law of demand says that quantity demanded varies inversely with price, other things constant the higher the price, the smaller the quantity demanded the lower the price, the larger the quantity demand. The law explains the degree of scarcity of one good relative to another helps determine each good's relative price. The definition of demand includes the "other things constant" assumption among the "other things" refers to the prices of other goods.

8.1 Application of Demand and Supply Analysis

Concept of Supply

It refers to both the ability to sell (produce) and the willingness to sell by the produce quantity of good or service at a point on time. Supply can also be shown by a supply schedule which shows the maximum quantity supplied at all different prices. It is also a flow concept. Time is an important factor affecting the condition of supply. There are again many factors affecting the supply of a firm. Economics hold the all things being equal condition in order to analyze the relationship between price and quantity supplied by a firm or producer. The interaction between demand and supply in a market, determines the market price of a good.