BASIC ECONOMY UNDERSTANDING FOR BEGINNERS #2==>DEMAND AND SUPPLY

BASIC ECONOMY UNDERSTANDING FOR BEGINNERS #2

"Teach a parrot the terms "demand" and "supply" and you've got an economist. "

-Thomas Carlyle

As the quote suggests, today, I talk about the most basic phenomena that regulate an economy i.e Demand and Supply.

Let's begin with Demand. Demand is all about "what" one wishes to have/purchase, "how" much quantity he requires and "when" does he require it. When I say 'he', I mean a consumer i.e any person who buys any good from the market. 

Supply, on the other hand, is all about "what" one wishes to produce, "how" much quantity he requires and "when" he wishes to produce it. It's all similar yet absolutely opposite. When I say 'he' here, I mean a producer i.e any firm/factory/market that manufactures/sells goods. 

Graph explaining the inverse relationship between the commodities

Without focusing on the man, let us look at these lines. Any person with a basic knowledge of a graph would instantly know these lines are in an inverse relationship status. The inverse relationship arises when the increase in one commodity leads to a decrease in the other. 

This is exactly what happens with our supply and demand or prices and demand. 

Consider this example. A firm produces 100 ballpoint pens and 100 gel pens. There are 100 consumers for ballpoint pens, and 100 for gel pens. Now, suddenly, the firm decides to manufacture 150 ballpoint pens and 50 gel pens. In economical terms, The supply of ballpoint pen increases, and the supply of gel pens decreases. 

Can you guess what happens to the demand for these pens?

More people now want gel pens (because it is human nature! you crave for what you do not have) So, now there are 100 (or maybe more) people who want gel pens but the producer has only 50 of them! How will he distribute them?

One way is to conduct a lucky draw!

But, that's not the case every time. The producer will think rationally and "economically". He will raise the price of the pen and suddenly only 60 people would be interested in gel pens with heightened prices. This will continue unless the supply meets the demand. That situation when arises is called EQUILIBRIUM. 

Equilibrium between demand and supply

There needs to be a balance between Demand and Supply for the Economy to function. 

DEMAND CURVE

The quantity demanded for any commodity does not always suit the wants or needs of the buyer/consumer. It depends on a number of various other factors like 

• price of the commodity
• price of other substitute commodities
• income level of consumer
• preferences
• seasonal effects (you will be surprised to know that the sales of maggie and tea leaves increase gigantically during the rainy season!)

The price-quantity are plotted on a curve that is called the demand curve

A demand curve comprises of the price which is represented on the vertical axis (or Y-axis) and quantity which is represented on the horizontal axis (or X-axis). 

One important characteristic of a demand curve is that it is always downward sloping. This means a consumer is more willing to buy products at a lower price level.

Demand curve

SUPPLY CURVE

The quantity of a commodity that any firm manufactures and the supplies to the market depends not only on the price obtainable for the commodity but on potentially many other factors. Some of these are 

•  prices of substitute products,
•  the production technology, 
•  availability and cost of labour and 
• other factors of production.

When we analyse "supply", we analyse the relationship between various prices and the quantity offered by producers at each price. All this, while holding all the factors that can influence price, constant. 

A supply curve comprises of the price which is represented on the vertical axis (or Y-axis) and quantity which is represented on the horizontal axis (or X-axis). One important characteristic of a supply curve is that it is always upward sloping. This means a producer is more willing to sell in the market with higher prices. 

Supply curve

Its lunchtime now, so I'll write more later. Please read and stay updated.

Happy Writing!