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  • One of the more important concepts in all economics is supply and demand. Chances are

  • you probably have at least some familiarity with the terms. Perhaps youve heard them

  • used in conversation, a segment on the evening news, or maybe youve taken a class in microeconomics.

  • If you live in the United States or any other country whose economic system resembles a

  • market economy, then youve experienced first-hand supply and demand at work.

  • Recall that in a market economy a nation’s government generally doesn’t get involved

  • in setting prices for markets. Instead, markets rely on supply and demand to determine how

  • to allocate resources and make decisions regarding price. Now that you know some of the theory

  • behind supply and demand lets define them.

  • Supply represents how much of a good or service a seller is both willing and able to provide

  • at various price levels. Now there are two important components to this definition. The

  • first is willingness, which refers to a desire. So in order for a firm to be considered one

  • who factors into supply they must have the desire to provide a good or service to consumers.

  • The second component is ability, which refers an actual ability to provide a good or service.

  • If a firm has a desire to provide a good or service, but lacks the financial means necessary

  • to do so, then it would not be considered according to this definition. Now being that

  • firm’s are run by people like you and I, and we all respond to incentives, sellers`

  • respond to markets in somewhat predictable ways. As the price that the seller can charge

  • for a good or service increases, they are willing to provide more of that good or service.

  • But as this price decreases, than sellers are less willing to expend the resources to

  • offer the good or service. This is because a firm’s profit margin decreases if theyre

  • forced to reduce prices. At a certain point, firm’s find it unwise to provide goods or

  • services and it’s likely that better opportunities exist for the firm. However if the price a

  • seller can charge increases, then firm’s will likely enter the market since they have

  • a greater chance at earning profit. This movement of the quantity that a seller will provide

  • at various price levels is called a supply curve, and is represented by an diagonally

  • upward sloping line. But without its counterpart supply would be virtually meaningless. So

  • lets talk about demand.

  • Demand represents how much of a good or service a buyer is both willing and able to purchase

  • at various price levels. Again, the presence of both willingness and ability is necessary

  • for there to be true demand. For example, lets say I wanted to purchase a brand new

  • car but my credit is poor and I lack the cash needed to complete the transaction. You would

  • say that although I have the willingness or desire to purchase a new vehicle, I lack the

  • ability to do so. Now as consumers we obviously respond to incentives as well. Naturally,

  • our incentive is acquire as many goods and services as we can without giving up our scarce

  • resources. So we will purchase more of something as its price decreases, while we will purchase

  • less of something as its price increases. This is exactly why retailers run sales promotions,

  • because they realize that doing so will increase demand for goods and services. Now the idea

  • that buyers will demand more goods as the purchase price decreases is characterized

  • by the demand curve. A downward sloping line that looks a bit like this.

  • It’s this tug of way balancing act that takes place between supply and demand that

  • explains how prices are set. Although each group, sellers and buyers, would rather acquire

  • as much money or spend as little as possible this wouldn’t work. Because the other party

  • is necessary to complete the transaction. Although buyers would likely purchase a large

  • amount of goods at low prices, sellers wouldn’t provide them. And likewise, although sellers

  • would be clamoring at the chance to sell goods and services at premium prices, buyers may

  • not be willing to purchase them. The point at which both parties compromise and the supply

  • and demand curves intersect is called the market price. At this price, both parties

  • are willing and able to sell and purchase goods at similar prices. We experience this

  • on a small scale when we go to the store and make a decision to purchase a tablet computer

  • or a new car. On a larger scale, if a sellers products go unpurchased, this could be a reflection

  • that buyers don’t have adequate demand at the offered price.

  • Again, it’s this interaction between buyers and sellers that helps us make decisions on

  • resource allocation as well as pricing. One thing I’ll add is supply and demand is a

  • helpful in interpreting, understanding, and articulating how markets operate, but they

  • don’t provide tactical application for a firm trying to set prices. With that said,

  • an understanding of supply and demand is important to grasping some of the more advanced concepts

  • in economics and understanding how we allocate resources.

One of the more important concepts in all economics is supply and demand. Chances are

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B1 US demand supply price purchase firm provide

Episode 168: Supply and Demand

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    alex posted on 2017/04/24
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