29. How do prices affect the quantities demanded?

In economics the relationship of demand and price is expressed by the Law of Demand. It says that the demand for an economic product varies inversely with its price. In other words, if prices are high the quantities demanded will be low. If prices are low the quantities demanded will be high.

The correlation between demand and price does not happen by chance. For consumers price is an obstacle to buying, so when prices fall, the more consumers buy.

The demand for some products is such that consumers do care about changes in price when they buy a great many more units of product because of a relatively small reduction in price. The demand for the product is said to be elastic.

For other products the demand is largely inelastic. This means that a change in price causes only a small change in the quantity demanded.

30. What factors is demand influenced by?

Demand is a consumer’s willingness and ability to buy a product or service at a particular time and place.

Demand is not only influenced by price, but also by many other factors, such as

• Change in the environment.

• Change in the item’s usefulness.

• Change in income of the demanders.

• Change in the price of substitute product.

• Change in the price or availability of complementary products.

• Change in styles, taste, habits, etc.

In economic analysis, these other factors are frequently assumed to be constant. This allows one to relate a range of prices to the quantities demanded in what is called the demand function (with price as the independent and demand as the dependent variable) and to graph this relationship in the demand curve.

31. What is supply?

Supply means the quantity of a product supplied at the price prevailed at the time. Supply may be defined as a schedule of quantities that would be offered for sale at all of the possible prices that might prevail in the market. Everyone who offers an economic product for sale is a supplier.

The law of supply states that the quantity of an economic product offered for sale varies directly with its price. If prices are high suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale. Since productivity affects both cost and supply it is important that care can be taken in selecting the proper materials. Productivity and cost must be kept in mind in order to make the best decision. It means a business must analyse the issue of costs before making its decisions.

32. What factors is supply determined by?

Supply means the quantity of a product supplied at the price prevailed at the time.

Supply is determined by price and also by other factors. Some of the more important factors affecting supply are:

• Goods own price. If prices are high suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale.

• Price of related goods. For purposes of supply analysis related goods refer to goods from which inputs are derived to be used in the production of the primary good.

• Technology. A technological advance would cause the average cost of production to fall which would be reflected in an outward shift of the supply curve.

• Expectations. Sellers expectations concerning future market condition can directly affect supply.

• Price of inputs. Inputs include land, labor, energy and raw materials.

• Government policies and regulations.