Narrative Report in
Demand and Supply
in a Market System
Submitted By: Angel Genez Baluyut
Introduction
The law of demand says that at higher prices, buyers will demand less of an economic
good. The law of supply says that at higher prices, sellers will supply more of an
economic good. These two laws interact to determine the actual market prices and
volume of goods that are traded on a market. Supply and demand are both very
important to economic activity. Supply is the total amount of a particular good or
service available at a given time to consumers at a given price. Demand is a
representation of a consumer's desire to purchase goods and services; it acts as a
measurement of a consumer's willingness to purchase a specific good or service at a
given price. These two economic forces influence each other; they are both important
for the economy because they impact the prices of consumer goods and services within
an economy and the quantities produced and consumed.
DEMAND AND SUPPLY IN A MARKET SYSTEM
Demand
Quantities of a particular good or service consumers are willing and able to buy at
different possible prices.
Demand Function
A demand function is a list of prices and the corresponding quantities that individuals
are willing and able to buy at a fixed point of time. We may note at the outset that
demand is a function (or schedule), not a specific quantity. It is formally defined as a
schedule of the total quantities of a commodity or service that will be purchased at
various prices at a particular point of time.
Individual Demand Function
Individual demand function refers to the functional relationship between demand made
by an individual consumer and the factors affecting the individual demand. It shows
how demand made by an individual in the market is related to its determinants.
Market Demand Function
Market demand function refers to the functional relationship between market demand
and the factors affecting market demand. As mentioned before, market demand is
affected by all factors affecting individual demand. In addition, it is also affected by size
and composition of population, season and weather and distribution of income.
Change in Quantity Demand
A change in quantity demanded refers to a change in the specific quantity of a product
that buyers are willing and able to buy. This change in quantity demanded is caused by
a change in the price.
Change in Demand
A change in demand represents a shift in consumer desire to purchase a particular good
or service, irrespective of a variation in its price. The change could be triggered by a
shift in income levels, consumer tastes, or a different price being charged for a related
product.
Inferior, Normal and Superior Goods
1. Inferior Goods
Inferior goods are those whose demand moves in opposite direction to the income
variation of consumers. This occurs because consumers’ preferences change to other
goods that are more highly regarded.
2. Normal Goods
Normal goods are those whose demand increases due to a rise in income levels, having
therefore a positive correlation, which implies that the elasticity of this kind of goods is
always higher than 0.
3. Superior Goods
Superior goods, also known as luxury goods, are those goods that displace the demand
of inferior goods after a rise in consumers’ income. They are a kind of normal goods as
their demand increases when income does as well.
Complements and Substitutes
Complements are goods that are consumed together. Substitutes are goods where you
can consume one in place of the other. The prices of complementary or substitute
goods also shift the demand curve. When the price of a good that complements a good
decreases, then the quantity demanded of one increases and the demand for the other
increases. When the price of a substitute good decreases, the quantity demanded for
that good increases, but the demand for the good that it is being substituted for
decreases.
Expectations
One of the demand shifters is buyers' expectations. If a buyer expects the price of a
good to go down in the future, they hold off buying it today, so the demand for that
good today decreases. On the other hand, if a buyer expects the price to go up in the
future, the demand for the good today increases.
Supply Function
Supply Function in Economics
The supply function in economics is applied to access how much of a given product
requires to supply for a provided good price. It is used in conjunction with the demand
function to circumscribe equilibrium pricing for various markets and products. Supply
functions in Economics can be calculated in the following steps:
Defining the price of goods correlated to the product whose supply function is to
be calculated.
Finding out how many producers or suppliers of the given good are there.
Determining the function based on how the assigned quantities would influence
the supply of a product.
Equilibrium
Equilibrium is the state in which market supply and demand balance each other, and as
a result prices become stable. Generally, an over-supply of goods or services causes
prices to go down, which results in higher demand—while an under-supply or shortage
causes prices to go up resulting in less demand. The balancing effect of supply and
demand results in a state of equilibrium.
Market Adjustment to Change
A market adjustment is a change in market parameters or conditions brought about in
response to one or more market signals (including price changes from shifts in supply
and demand). These changes are typically characterized as cycles, fluctuations, or
trends.
Shifts or Changes in Demand
A change in demand describes a shift in consumer desire to purchase a particular good
or service, irrespective of a variation in its price. The change could be triggered by a
shift in income levels, consumer tastes, or a different price being charged for a related
product.
Equilibrium and the Market
The intersection of the supply and demand curves determines the market equilibrium.
At the equilibrium price, the quantity demanded equals the quantity supplied. Because
the graphs for demand and supply curves both have price on the vertical axis and
quantity on the horizontal axis, the demand curve and supply curve for a particular
good or service can appear on the same graph. Together, demand and supply
determine the price and the quantity that will be bought and sold in a market.
Conclusion
The supply and demand for a product determine the market price of that good. Supply
and demand is possibly one of the most fundamental economic ideas and the backbone
of a market economy in today's world. The connection between supply and demand is
essential because it determines the pricing and quantities of most goods and services
accessible in a market.
