Principles of Microeconomics

Principles of Microeconomics

Principles of Microeconomics

1. Supply and Demand

You may not realize it, but every time you purchase something, you are participating in a market for that good. Some people supply it, and some people—you!—demand it.

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply Represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

The four basic laws of supply and demand are

If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity.

If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity.

If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.

If supply decreases and demand remains unchanged, then it leads to higher equilibrium price and lower quantity.

 

The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand says that the quantity of a good demanded falls as the price rises, and vice versa.


SUPPLY CURVE

Below is a graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph and quantity of product supplied on the horizontal axis.



 

SUPPLY CURVEM4.gif

 

DEMAND CURVE

Below is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule.

 

DEMAND CURVEM5.gif


 

Two important considerations arise in all applications of supply and demand analysis. First, the shapes of the supply and demand curves must be established within the context of the problem being analyzed. Second, the forces leading to shifts in the supply and demand curves must be determined in the case at hand. The effects of the forces shifting the supply and demand on the equilibrium price and quantity can then be obtained


 

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