The relationship between demand and supply underlie the forces behind the distribution of resounces. In market economy theories, demand and supply theory will distribute resounces in the most efficient way.
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price increases, so does the opportunity cost of buying that certain good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.
A, B and C are points on the demand curve. Each point on the curve reflects a direct distribution between quantities demanded (Q) and price (P). At point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C). The weather forecast (October 2012) listed that it is a rainy season. During this season, umbrellas are the product that will be in great demand. Therefore, the quantity demanded is high whereas the price will be low.
Like the law of demand, the law of supply illustrates the quantities that will be sold at a certain price. But opposite of the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue.
A, B and C are points on the supply curve. Each point on the curve reflects a direct distribution between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. Suppliers know it is a rainy season and they may want to increase the price of the good so that they are able to make more money. If price of the umbrellas increase, buyers will not have a choice but they would still purchase the good due to the weather.
The supply relationship is a factor of time. Time is important to supply because suppliers must but cannot always react quickly to a change in demand or price. It is very important to try and determine whether a price change that is caused by demand will be temporary or permanent.
Example, there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season. Suppliers may simply hold the demand by using their production equipment more intensively. If there is a climate change, and the population will need umbrellas all year round, the change in demand and price will be expected to be long term. Suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.
Imagine that a special edition umbrella of popular cartoon such as Hello Kitty is released for RM100. Because the record company's previous analysis showed that consumers will not demand umbrellas at a price higher than RM60, only a few pieces of umbrellas were released because the opportunity cost is too high for suppliers to produce more. However, if 10 special editions of umbrellas are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. It means that the rise in price should prompt more umbrellas to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If there are 30 umbrellas produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their purchases, the price of the leftover umbrellas may decreases as producers attempt to sell the remaining umbrellas. The lower price will then make the umbrella more available to people who had not bought it yet.
When supply and demand are equal and intersect on each other, the situation can be defined as equilibrium. At this point, the distribution of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Everyone will be satisfied with the economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. In the rainy season, suppliers will supply umbrellas at a reasonable price and buyers will satisfy and tend to purchase more goods.
Equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocate inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
The conclusion is if the price of umbrella decreases, the demand of it will increases. At the same time, consumers will tend to purchase more in the rainy season. If the price of umbrella increases, consumers will still purchase but they will not purchase them in a large amount.
Yeo Ee Ling
This information is been useful for me.
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