Demand and supply

Demand is a consumer's willingness and ability to buy a product or service at a particular time and place. If you would love to own a new pair of athletic shoes but can't afford them, economists would describe that your feeling are desire, not demand. If, however, you had the money and were ready to spend it on shoes, you would be included in their demand calculations.

The law of demand describes the relationship between prices and the quantity of goods and services that would be purchased at each price; it says that all else being equal, more items will be sold at a lower price than at a higher price.

The degree to which price changes affect demand will depend upon the elasticity of demand for a particular item.

If total revenue increased following a price decrease, demand would be elastic if the price decrease led to a decrease in total revenue, the demand for the item would be described as inelastic.

Sometimes things happen that change the demand for an item at each and every price. When this occurs, we have an increase or a decrease in demand.

Supply, which is the quantity of goods or services that sellers offer for sale al ail possible prices at a particular time and place, varies directly with price. In other words, at a higher price, more goods and services will be offered for sale than at a lower one, and vice versa.

The price at which goods and services actually change hands is known as the equilibrium, or market price. It is the point at which the quantity demanded exactly equals the quantity supplied. Market price can be represented graphically as the point of intersections of the supply and demand curves.

Shifts in demand or supply will affect market price. When everything else is held constant, an increase in demand will result in an increase in market price, and vice versa. Similarly, an increase in supply will result in a decrease in price, and vice versa.

PRICE

Price can be defined as something of value that is exchanged for something else. Price is obviously important to us as consumers because we have limited or fixed incomes that affect our purchasing power. The higher the price of goods and services, the lower the total quantity or quality of goods and services we can purchase. As prices rise we can buy fewer items or items of lesser quality.

Prices play an important role in all economic markets. If there were no price system, it would be impossible to determine a value for any goods or services. In a market economy prices act as signals. A high price, for example, is a signal for producers to produce more and for buyers to buy less. A low price is a signal for producers to produce less and for buyers to buy more. Prices serve as a link between producers and consumers. Prices, especially in a free market system, are also neutral. That is, they favor neither the producer nor consumer.

Price is all around us. You pay rent for your apartment, tuition for your education and fee to your doctor or dentist. The airline, taxi and bus companies charge you fare, the local services call their price rate and the local bank makes you pay charges and interest for the money you borrow. The price for driving your car on a motorway is a toll and the company that insures you charges a premium. The guest speaker charges you an honorarium to tell you about the government official; who took a bribe to help some character steal dues collected by the trade union. Your regular lawyer may ask for retainer to cover his / her services. The price of an executive is a salary, the price of a sales person may be a commission and, the price of a worker is a wage.

All organizations must decide the price at which they are willing to sell their goods and services. All buyers, whether they are consumers or organizational buyers, must decide the price they are willing to pay for those goods and services. Frequently, sellers have what buyers want but no exchange occurs because the price is too high. You may want a new car when you start your first job, but you will probably not be able to afford most of the cars that you want.