Supply and Demand

The law of supply and demand is the backbone of a market economy. The fundamental concept refers to the relationship between the sellers and buyers of a particular resource. Here, a change in one of the parameters causes a change in another. According to this theorem, when there is a higher demand for a commodity, the need for its supply will be high and vice versa. The equation states that the desire for a product and its fulfillment are interdependent Supply and demand are equated in a free market through the price mechanism. If buyers wish to purchase more of a good than is available at the prevailing price, they will tend to bid the price up. If they wish to purchase less than is available at the prevailing price, suppliers will bid prices down. The price mechanism thus determines what quantities of goods are to be produced. The price mechanism also determines which goods are to be produced, and who will get the good—i.e.,how the goods will be distributed. Goods so produced and distributed may be consumer items, services, labor, or other salable commodities. In each case, an increase in demand will lead to the price being bid up, which will induce producers to supply more; a decrease in demand will lead to the price being bid down, which will induce producers to supply less. The price system provides a simple scale by which competing demands may be weighted by every ca The tendency to move toward the equilibrium price is known as the market mechanism, and the resulting balance between supply and demand is called market equilibrium. As the price of a good rises, the quantity offered usually increases, and the willingness of consumers buying goods normally declines, but those changes are not necessarily proportional. The measure of the responsiveness of supply and demand to changes in pierce is called the price elasticity of supply or demand, calculated as the ratio of the percentage change in quantity supplied or demanded to the percentage change in price. Thus, if the price of a commodity decreases by 10 percent, then the price elasticity of demand for that commodity is said to be 2.