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What is the law of demand? Introduction of supply and demand in economics

The terms supply and demand are related to people’s behavior and how they deal in the market. A market consists of two groups of buyers and sellers. Buyers are the group that determine the demand for a product and sellers are the group that determine the supply of a product. Since the economics of all markets work based on the forces of supply and demand, the main tool for understanding price fluctuations in investment markets is supply and demand analysis. In this article by presenting a simple example to introduce these economic concepts and law of demand we pay

What factors determine the quantity demanded of a product?

To answer this question and understand better, let’s assume that the demanded product is red apples. Consider your demand for it. How do you decide how many apples to buy each month? But what factors affect this decision? Some of these factors are as follows:

1. The price of goods

If the price of each kilo of apples becomes 70 thousand tomans, you will buy less, and if the price reaches 10 thousand tomans, you will buy more apples; Because when the price increases, the quantity of demand decreases and when the price decreases, its quantity increases. The relationship between price and quantity demanded for most economic goods is a negative relationship, economists call this inverse relationship between price and quantity demanded of a commodity. law of demand They call In other words, the law of demand tells you: “When the price of a good increases, other factors being constant, the quantity demanded of that good will decrease.”

2. Buyers’ income

If you lose your job and become unemployed, how will your apple purchases change? Chances are, you’ll buy fewer apples. Lower income means lower expenses overall. This means that you will spend less in total and your consumption will be less than most goods. If the demand for a product decreases due to a decrease in income, this product Normal product We call it (normal).

Of course, not all goods are normal. If the demand for a good increases with a decrease in income, that good Post goods is named. An example for a postal item is the use of a bus for commuting. When your income decreases, you may not be able to buy a car and try not to use a taxi. As a result, you will choose the bus for commuting.

3. The price of other goods

Suppose the price of green apples decreases. According to the law of demand, you buy more green apples. At the same time, your red apple purchases will decrease. Because both red and green apples have similar properties and provide you with the same satisfaction. If a decrease in the price of one good reduces the demand for the other good, then both goods Substitute product we call Substitute goods are goods that can be used interchangeably, such as hotdogs and hamburgers or red meat and chicken.

4. taste

An important factor determining the law of demand is taste. If you like apples, you will naturally buy more of them. Economists never try to explain people’s tastes, because taste depends on historical and psychological motivations and forces and is outside the scope of economics.

We suggest that if you are interested in the subject of psychology, read the article on market psychology.

5. expectations

Your expectations about the future may affect your demand for goods and services in the present. For example, if you expect to earn more in the future, you may decide to spend a portion of your current savings on apples, or if you expect the price of apples to drop tomorrow, you may buy less today.

Demand law table and curve

In the above section, you saw that many variables determine the amount of demand for apples for a person. Suppose all these variables, except for the price of the product itself, are constant. Now we will examine the issue of what effect the change in the price of the product has on the amount of demand for that product.

The price of each kilo of apples (tomans) demand quantity
0 10
100,000 8
20000 6
30000 4
40000 2
50000 0

In the picture above, you can see the demand table of “Ali”. The demand schedule, which shows the quantity demanded at each price, shows how many apples Ali will buy at different prices. If apples are free, he buys 10 kg of them. At the price of 10 thousand Tomans, Ali buys 8 kg of it. As the price increases, he buys less and less apples, until at the price of 50,000 Tomans, he does not buy any apples.

A demand curve is a graph drawn based on the law of demand table. This curve shows the change in quantity demanded relative to the change in price. As you can see in the above diagram, the price of the commodity is on the vertical axis and the quantity demanded is on the horizontal axis. Since at lower prices the quantity demanded increases (and vice versa, reminiscent of the law of demand), the demand curve is downward sloping.

What factors determine the amount of supply of a company?

To answer this question and understand better, suppose you own an apple orchard. What factors affect the amount of apples you are willing to sell? Some of these factors are as follows:

1. The price of goods

The price of apples is a factor that determines the quantity supplied. When the price of apples is high, its sale is profitable and its supply is high. As the price rises, you as an apple grower work more hours, buy more land, machinery and tools, and hire more workers. On the contrary, when the price of apples is low, your business also has a small profit and therefore you produce less apples. At lower prices, you may even withdraw from this activity and reduce production to zero.

Since the supply quantity of a commodity increases with the increase in its price and decreases with the price decrease, we say that the supply quantity has a positive relationship with the price of the commodity, the positive relationship between the price and the supply quantity law of supply we call According to the law of supply, assuming that other factors affecting supply are constant, the price and supply of a commodity increase together.

2. The price of production inputs

An apple orchard uses various inputs for production: agricultural tools, land, workers, etc. When the price of one or more production inputs increases, the production profit decreases and the firm supplies less. If the price of inputs increases a lot, the company may close down and stop apple production. Therefore, the supply of a product has a negative relationship with the price of inputs needed to produce that product.

3. Technology

Technology is an important factor in supply. For example, drip irrigation systems or agricultural machinery reduced the number of workers needed. As production costs decrease due to improved technology, supply also increases.

4. expectations

The amount of supply at the present time depends on your expectations for the future. For example, if you expect that the price of apples will increase in the future, you will store part of your production in cold storage and reduce your supply in the present.

Table and supply curve

Now that we are familiar with the law of demand, let’s review the table and the supply curve. Assuming that other factors affecting supply are constant, such as the price of production inputs, technology, and expectations, how does the quantity supplied change with a change in price?

The price of each kilo of apples (tomans) Supply quantity
0 0
100,000 1
20000 3
30000 5
40000 7
50000 9

The supply table shows the quantity supplied at each price. In the table above, you can see the different supply values ​​of an apple producing company. At a price less than 10,000 Tomans, the supply is zero, but as the price increases, the supply becomes more and more.

Apple supply curve

The above diagram shows the relationship between the quantity supplied of apples at each price. This curve, which shows the relationship between price and quantity supplied, is called the supply curve. With other factors affecting supply constant, the supply curve becomes upward sloping. Higher price means more supply.

The concept of balance in economics

In the above sections, we talked separately about the law of demand and supply in economics. Now, in this part, by combining supply and demand, we get the market price and the quantity of sold goods.

As you can see in the diagram below, the supply and demand curves intersect at only one point, this point. market equilibrium It is called The price corresponding to this point (market equilibrium point). balanced price and the corresponding value of this point Equilibrium value we call

Supply and demand in economics

In dictionaries, balance means the state of equalization of different forces. Market equilibrium also means the same. At the equilibrium price, the amount of goods that buyers are willing to buy is exactly equal to the amount of goods that sellers are willing to sell. Equilibrium price sometimes Market settlement price We call it because at this price, all buyers and sellers are satisfied: the buyers have bought the goods they want and the sellers have sold the goods they want.

The activity of buyers and sellers naturally leads the markets to balance supply and demand. To understand the reason for this situation, suppose that the market price is not equal to the equilibrium price:

a) If the market price is higher than the equilibrium price.

Excess supply chart

If the market price is 40,000 Tomans, at this price, the supply quantity is 7 and the demand quantity is 2. In this case, we have excess supply, and this means that the sellers are not able to sell their desired product at the price of 40,000 Tomans. When we face an oversupply in the apple market, sellers will keep large quantities of apples in their cold stores. They want to sell their product but they can’t. Excess supply It causes the price to decrease and the prices will decrease until the market reaches equilibrium.

b) If the market price is lower than the equilibrium price.

Law of demand and surplus graph

If the market price is 20,000 Tomans, at this price, the supply quantity is 3 and the demand quantity is 6. As a result, the amount of demand is greater than the amount of supply. In this case, we have excess demand, which means that buyers are not able to buy all the goods they want at this price. When we face a shortage of demand in the market, buyers line up and compete with each other to buy the few available goods. With so many buyers competing for so few goods, sellers can raise prices without losing sales. With the price increase, the market moves towards equilibrium again.

Therefore, the activity of buyers and sellers causes the market price to automatically move towards the equilibrium price. When the market reaches equilibrium, all buyers and sellers are satisfied with the situation and there is no pressure to move the price up or down.

How quickly we reach equilibrium depends on how quickly prices adjust and varies from one market to another. In many free markets, excess supply and lack of demand is a temporary and fleeting situation, as prices eventually move toward equilibrium. In fact, this phenomenon is so common that it Law of supply and demand we call According to the law of demand and supply, the price of each commodity moves towards equilibrium to equalize supply and demand.

law of demand and supply; An image of market liquidity

In this article, we examined the law of supply and demand in the economy. Although our discussion focused on the apple market, what we have said can be applied to all markets. Also, pay attention to the fact that before making any investment on an asset, you must check the supply and demand of that asset. This factor gives you a general picture of the liquidity of assets. In the end, we hope this article was useful for you.

What is written law of demand? Introduction of supply and demand in economics for the first time in Wallex blog. appeared.


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