Supply and demand and price elasticity Essay Example | Topics and Well Written Essays - 3750 words

Supply and demand and price elasticity - Essay Example The key words in this definition are 'ability' and 'willingness'. By ability we mean that the consumer must have enough income or resources to meet the prices, and by willingness, it simple means that the buyer should want to buy the products. Only, if these two conditions are being satisfied, then a satisfied demand is registered in the market. To be more meaningful, the quantities demanded at each price must related to a specific period- a day, a week, a month. Saying that a consumer wants to buy 10 packets of chocolate at $10/each is useless unless a specific time period is states. The above diagram and table reveals a fundamental characteristic of a demand. This characteristics states that as the prices falls, the quantity demanded rises and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between the price and quantity demanded. In mathematical terms, there exists a negative or inverse relationship between the price and quantity demand, known as the law of demand. The basis behind this law of demand is com... In other words, price is an obstacle hat deters consumers from buying. Similarly, in any specific time period people will buy at a low price because it maximizes their diminishing marginal utility. There are two other reasons behind the law of demand. These are income effect and substitution effect. Income effect states that people enjoy high purchasing power as prices decrease and hence buy more. The substitution effect, on the other hand, states that at a lower price, buyers will substitute what is now a less expensive product for similar products that are more expensive. The relationship between price and quantity demanded for any product can be expressed as a simple graph, shown above. So, far our discussion of demand is for individual and not for a market demand. Market demand is also similar to the concept of individual demand. It involves add the quantities demanded by all consumers at each of the various possible and this will enable us to move from individual demand to market demand. PRICE FIRST BUYER 2ND BUYER 3RD BUYER TOTAL MARKET DEMAND 0 4 3 3 10 5 2 2 1 5 10 1 2 0 3 1ST BUYER 2ND BUYER 3RD BUYER MARKET p P P P + + =Q Q Q Q This was only the one side of market and tells us partly about the market condition. The other side of the market consists of people who want to sell the goods to the buyers in order to earn profits. Like demand, supply is a schedule or curve showing the amounts of a