The Law of Supply and Demand
A market is an environment where buyers and sellers interact to exchange goods, the price for which are determined by both the supply and demand for them. ‘A market uses prices to reconcile decisions about consumption and production’.¹ The supply/demand model helps to explain how the market works and gives a greater understanding of actual market behaviour. Therefore, analysis of this concept can be used to develop economic and business decisions and policies. The purpose of this assignment is to outline the basic elements of the model and discuss its usefulness in understanding actual behaviour in the market place.
The supply of goods and resources are limited in comparison to peoples requirements, and individuals must make decisions based on what goods to buy or produce and what goods to forgo. Because of this scarcity of resources, individuals, businesses and governments must make decisions on how to allocate them most efficiently. The market mechanism resolves the problem of allocation by adjusting prices to coincide with demand and scarcity. Market prices continuously adjust to equate quantity demanded with quantity supplied. This forms the basis of the supply/demand model which also analyses the reaction of suppliers and customers and makes predictions about how they will react to changes in the market. The predictions are then applied to the actual market. The model is beneficial as an aid to making economic decisions because the concept assumes the effects of various changes in theory, which can be applied in practice to the actual business world. Elements of the theory are used annually in our budget, for example, in the pricing of inelastic products such as cigarettes, diesel, petrol etc. These are necessities and, as per the theory, a price rise has little or no effect on demand for these inelastic products.
The law of supply demonstrates the quantities that will be sold at a certain price. It makes assumptions about how suppliers will
The supply of goods and resources are limited in comparison to peoples requirements, and individuals must make decisions based on what goods to buy or produce and what goods to forgo. Because of this scarcity of resources, individuals, businesses and governments must make decisions on how to allocate them most efficiently. The market mechanism resolves the problem of allocation by adjusting prices to coincide with demand and scarcity. Market prices continuously adjust to equate quantity demanded with quantity supplied. This forms the basis of the supply/demand model which also analyses the reaction of suppliers and customers and makes predictions about how they will react to changes in the market. The predictions are then applied to the actual market. The model is beneficial as an aid to making economic decisions because the concept assumes the effects of various changes in theory, which can be applied in practice to the actual business world. Elements of the theory are used annually in our budget, for example, in the pricing of inelastic products such as cigarettes, diesel, petrol etc. These are necessities and, as per the theory, a price rise has little or no effect on demand for these inelastic products.
The law of supply demonstrates the quantities that will be sold at a certain price. It makes assumptions about how suppliers will