Concept of Demand and Supply in Economics
As pointed out in the previous article, the Price Mechanism balances the forces of Demand and Supply.
It was Adam Smith in 1776 who first used the terms Demand and Supply as corresponding concepts. Later Alfred Marshall compared them to the two blades of a pair of scissors. Indeed Demand and Supply are the two most crucial concepts of Microeconomics.
Concept of Demand
The word Demand comes from the Latin demandare, to claim or commission. Demand is desire backed by purchasing power. A buyer or consumer does not merely desire a commodity or good (or service) but has some power or wherewithal to purchase it at a price. Similarly, a seller or producer does not merely offer his commodity or good (or service) but offers them at a price.
There exists at any one time a definite relationship between the market price of a good and the quantity demanded of that good. This relationship between price and quantity demanded/bought is called the Demand schedule or Demand function or Demand curve.
One usual form that the Demand curve can take is downward-sloping from left to right. That is, there is an inverse or indirect relationship between the quantity of demand for a commodity and its price. (It is this relationship which has often been called the Law of Demand.)
The Demand Schedule below depicts this as follows:
Price (P) Rs per kg | Quantity Demanded (Qd) Kg | |
A | 5 | 9 |
B | 4 | 10 |
C | 3 | 12 |
D | 2 | 15 |
E | 1 | 20 |
Prices are measured on the vertical axis, and the quantities demanded are on the horizontal. Each pair of Q, P numbers from the Demand Schedule is plotted here as a point on the Q-P plane, and a smooth curve passed through the points to yield the Demand `curve’. It slopes downwards from Left to Right, showing an Inverse or Negative relation between price and quantity.
Concept of Supply
Supply comes from Latin supplere, to fill up or complete.
There exists at any one time a definite relationship between the market price of a good and the quantity the producers of that good are willing to offer or supply. This relationship between price and quantity supplied is called the Supply schedule, function and curve.
Based on the Supply schedule below, a supply curve can be depicted. Usually, it slopes upwards from left to right.
The Supply Schedule below depicts this as follows:
Price (P) Rs per Kg | Quantity Supplied (Qs) Kg | |
A | 5 | 18 |
B | 4 | 16 |
C | 3 | 12 |
D | 2 | 7 |
E | 1 | 0 |
Prices are measured on the vertical axis, and the quantities supplied on the horizontal. Each pair of Q, P numbers from the Supply Schedule is plotted here as a point on the Q-P plane, and a smooth curve passed through the points to yield the Supply `curve’. It slopes upwards from Left to Right, showing a Direct or Positive relation between price and quantity.
The above Demand and Supply are individual in nature, belonging to an individual person, household or firm. In Macro-Economics, the corresponding concepts are Aggregate Demand and Aggregate Supply. They represent the total demand and supply of the economy as a whole.
Read More- Microeconomics
- Microeconomics: Definition, Meaning and Scope
- Methods of Analysis in Economics
- Problem of Choice & Production Possibility Curve
- Concept of Market & Market Mechanism in Economics
- Concept of Demand and Supply in Economics
- Concept of Equilibrium & Dis-equilibrium in Economics
- Cardinal Utility Theory: Concept, Assumptions, Equilibrium & Drawbacks
- Ordinal Utility Theory: Meaning & Assumptions
- Indifference Curve: Concept, Properties & Shapes
- Budget Line: Concept & Explanation
- Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
- Applications of Indifference Curve
- Measuring Effects of Income & Excise Taxes and Income & Excise Subsidies
- Normal Goods: Income & Substitution Effects
- Inferior Goods: Income & Substitution Effects
- Giffen Paradox or Giffen Goods: Income & Substitution Effects
- Concept of Elasticity: Demand & Supply
- Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
- Determinants of Price Elasticity of Demand
- Measuring Price Elasticity of Demand
- Price Elasticity of Supply and Its Determinants
- Revealed Preference Theory of Samuelson: Concept, Assumptions & Explanation
- Hicks’s Revision of Demand Theory
- Choice Involving Risk and Uncertainty
- Inter Temporal Choice: Budget Constraint & Consumer Preferences
- Theories in Demand Analysis
- Elementary Theory of Price Determination: Demand, Supply & Equilibrium Price
- Cobweb Model: Concept, Theorem and Lagged Adjustments in Interrelated Markets
- Production Function: Concept, Assumptions & Law of Diminishing Return
- Isoquant: Assumptions and Properties
- Isoquant Map and Economic Region of Production
- Elasticity of Technical Substitution
- Law of Returns to Scale
- Production Function and Returns to Scale
- Euler’s Theorem and Product Exhaustion Theorem
- Technical Progress (Production Function)
- Multi-Product Firm and Production Possibility Curve
- Concept of Production Function
- Cobb Douglas Production Function
- CES Production Function
- VES Production Function
- Translog Production Function
- Concepts of Costs: Private, Social, Explicit, Implicit and Opportunity
- Traditional Theory of Costs: Short Run
- Traditional Theory of Costs: Long Run
- Modern Theory Of Cost: Short-run and Long-run
- Modern Theory Of Cost: Short Run
- Modern Theory Of Cost: Long Run
- Empirical Evidences on the Shape of Cost Curves
- Derivation of Short-Run Average and Marginal Cost Curves From Total Cost Curves
- Cost Curves In The Long-Run: LRAC and LRMC
- Economies of Scope
- The Learning Curve
- Perfect Competition: Meaning and Assumptions
- Perfect Competition: Pricing and Output Decisions
- Perfect Competition: Demand Curve
- Perfect Competition Equilibrium: Short Run and Long Run
- Monopoly: Meaning, Characteristics and Equilibrium (Short-run & Long-run)
- Multi-Plant Monopoly
- Deadweight Loss in Monopoly
- Welfare Aspects of Monopoly
- Price Discrimination under Monopoly: Types, Degree and Equilibrium
- Monopolistic Competition: Concept, Characteristics and Criticism
- Excess Capacity: Concept and Explanation
- Difference Between Perfect Competition and Monopolistic Competition
- Oligopoly Market: Concept, Types and Characteristics
- Difference Between Oligopoly Market and Monopolistic Market
- Oligopoly: Collusive Models- Cartel & Price Leadership
- Oligopoly: Non-Collusive Models- Cournot, Stackelberg, Bertrand, Sweezy or Kinked Demand Curve
- Monopsony Market Structure
- Bilateral Monopoly Market Structure
- Workable Competition in Market: Meaning and Explanation
- Baumol’s Sales Revenue Maximization Model
- Williamson’s Model of Managerial Discretion
- Robin Marris Model of Managerial Enterprise
- Hall and Hitch Full Cost Pricing Theory
- Andrew’s Full Cost Pricing Theory
- Bain’s Model of Limit Pricing
- Sylos Labini’s Model of Limit Pricing
- Behavioural Theory of Cyert and March
- Game Theory: Concept, Application, and Example
- Prisoner’s Dilemma: Concept and Example