Demand and Supply

What are demand and supply, and what factors influence them?

Summary

Demand and supply are the two forces that make market — based economies work. Demand reflects what consumers are willing and able to purchase at various prices. Supply reflects what producers are willing and able to produce at various prices. Price is related to the quantity of goods that consumers want and producers will provide, though other variables can have a significant influence as well. Economists use elasticity as a tool for measuring how responsive consumers and producers are to price changes.

How do demand and price interact? The law of demand states that as the price of a good or service increases, the quantity demanded decreases. As the price decreases, the quantity demanded increases. The inverse relationship of quantity demanded and price can be shown in a demand schedule and graphed as a demand curve.

What can cause demand to change? Demand in a market changes when quantities demanded at all prices increase or decrease. On a graph, a change in demand causes the demand curve to shift. Significant demand shifters include income, the number of consumers, and the price of substitutes.

How do supply and price interact? The law of supply states that as the price of a good or service increases, the quantity supplied increases. As the price decreases, the quantity supplied decreases. The direct relationship of quantity supplied and price can be shown in a supply schedule and graphed as a supply curve.

What can cause supply to change? Supply in a market changes when quantities supplied at all prices increase or decrease. On a graph, a change in supply causes the supply curve to shift. Significant suppl>. shifters include cost of inputs, number of producers, and new technology.

What is demand elasticity? What factors influence it? Demand elasticity is a measure of how responsive consumers are to changes in price. Demand elasticity is influenced by such factors as the availability of substitutes, the product’s price relative to income, whether the product is a necessity or a luxury, and the time needed to adjust to a price change.

What is supply elasticity? What factors influence it? Supply elasticity is a measure of how responsive producers are to changes in price. Supply elasticity is influenced by such factors as the availability and mobility of inputs, a producer’s storage capacity, and the time needed to adjust to a price change.