Download Supply And Demand, Definitions.

Supply And Demand, Definitions.
Author: Matt Johnson
In the context of supply and demand discussions, demand refers to the quantity of a good that is desired
by buyers. An important distinction to make is the difference between demand and the
quantity demanded. The quantity demanded refers to the specific amount of that product that buyers
are willing to buy at a given price. This relationship between price and the quantity of product
demanded at that price is defined as the demand relationship.
Supply is defined as the total quantity of a product or service that the marketplace can offer. The
quantity supplied is the amount of a product/service that suppliers are willing to supply at a given
price. This relationship between price and the amount of a good/service supplied is known as the
supply relationship.
When thinking about demand and supply together, the supply relationship and demand relationship
basically mirror each other at equilibrium. At equilibrium, the quantity supplied and quantity demanded
intersect and are equal.
In the diagram below, supply is illustrated by the upward sloping blue line and demand is illustrated by
the downward sloping green line. At a price of P* and a quantity of Q*, the quantity demanded and
the supply demanded intersect at the Equilibirum Price. At equilibrium price, suppliers are selling all the
goods that they have produced and consumers are getting all the goods that they
are demanding. This is the optimal economic condition, where both consumers and producers of goods
and services are satisfied.
The Law Of Demand
Very simply, the law of demand states that if all other factors remain constant, if a good's price is higher,
fewer people will demand it. As the price of that good goes down, the quantity of that good that the
market will demand will increase. In the diagram below, you see this relationship. At price P1, the
quantity of that good demanded is Q1. If the price of this good were to be decreased to P2, the
quantity of that good demanded would increase to Q2. The same is true for P3 and Q3. When prices
move up or down (assuming all else is constant), the quantity demanded will move up or down the
demand curve and define the new quantity demanded.
The Law of Supply
After understanding the law of demand, the law of supply is simple; it's effectively the inverse of the law
of demand. The law of supply states that as the price rises for a given product/service, suppliers are
willing to supply more. Selling more goods/services at a higher price means more revenue. In the
diagram below, you can see that as the price shifts from P1 to P2, the quantity supplied of that good shifts
from Q1 to Q2. The movement in price (up or down) causes movement along the supply curve and the
quantity demanded will change accordingly.
http://www.sophia.org/tutorials/economic-basics-supply-and-demand