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Business Economics - What is Supply and Demand?

When understanding price in the market and in order to work in business, it is important to understand what is supply and demand? Demand is derived from consumers' tastes and preferences, and it is bound by income, information, price of related goods (substitute or complement goods), and government regulations. For example, given a limited income, a consumer must purchase those goods and services that he likes best and fall within his budget.

A demand curve is a graphical representation of the law of demand and it has a negative slope. We plot price on the vertical axis and quantity demanded on the horizontal axis.

We do not have "The Law of Supply and Demand" But we have two separate laws, which is the Law of Supply and the Law of Demand, and each works independently of the other. The Law of Demand conveys that demand curves slope downward, and if nothing else changes to offset the changes in price, then the higher the price, the less people will want to buy and the quantity demanded will be less. For example, when the price of apple-pear rises, we buy less of it and when it is on sale, we purchase more of it.

A change in price will results in a movement along a fixed demand curve, and a change in any other variables other than the price that influences quantity demanded produces a shift in the demand curve. The demand curve shifts to the right when the consumer income rise, their population increases, their taste and preferences increase, the price of a substitute rises, or the price of a complement falls. A substitute is goods that can be consumed in places of one another, and a complement is goods that are typically consumed together. Equilibrium occurs at the price in which quantity demanded equals quantity supplied. A shortage occurs when the quantity demanded go beyond the quantity supplied, and a surplus occurs when the quantity supplied go beyond the quantity demanded. If the demand curve shifts to the right or left, it will results in a higher or lower equilibrium price or quantity.

On the other hand, supply is resulting from a producer's desire to enlarge profits. When the price of a product (example computer) rises, the supplier of computer might have an incentive to increase production because they can justify the higher costs to produce computer, thus increasing the potential to earn larger profits.

Holding other things equal, the Law of Supply conveys that as the price of a good or service rises,

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