The law of supply and demand describes the interaction between sellers of a resource and buyers of that resource. The effects of the relationship between the current situation of a particular product and the demand for that product on the price are explained by the law of supply and demand. While the law of demand explains the desire to buy a good, the law of supply; It is the sale of a good or service in a certain market, at a certain time and at a certain price.
The two laws interact to determine the actual market prices and volume of goods traded in a market. Various factors can affect supply and demand in the market. This leads to price and quantity changes.
law of demand;
- Number of replacements,
- consumer preferences,
- The complementary product is affected by the factors of price variation.
Factors affecting supply are;
- Production capacity,
- It can be listed as production costs such as materials.
What is the law of demand?
The law of demand explains that when all factors are equal, the higher the price of a good, the less demand people will have for that good. The quantity of the good that the consumer buys at a high price is less than the others. The most important reason for this is that when the price of a good increases, the opportunity cost of that good increases.
What are the factors affecting demand?
Factors affecting demand are the number of substitutes available, consumer preferences and price changes of complementary products. When we explain with an example; If the price of game consoles goes from $400 to $200, the number of people wanting to buy these consoles will increase. Subsequently, consumers will start showing more demand for the games they can play on these consoles. This will result in a rise in the demand curve.
What is the law of supply?
The law of the sale of goods at a certain price is the law of supply. Unlike the law of demand, the supply relationship has an upward slope. It turns out that the higher the price, the greater the quantity of product to be supplied. With high-priced products, manufacturers ensure a larger supply. The most important reason for this is that a higher price is defined as a higher sales amount. It also means increased income.
Unlike the demand relation, the supply relation evolves under the effect of the time factor. Time is an essential factor for supply. Suppliers need to react quickly to demand or price changes. However, they are not always able to react quickly. It is very important to determine and analyze whether the price change caused by demand is temporary.
What are the factors affecting supply?
Factors affecting supply can be listed as production capacity, production costs such as labor and materials, and the number of competitors directly affecting the amount of companies’ supply. Material availability, weather conditions and supply chain reliability can also affect supply to some degree like other factors.
How are supply and demand balanced?
The market clearing price is the market clearing price at which the producer can sell all the products he wants to produce and the buyer can buy all the units he wants. The supply of the good offered on the market within a certain period of time remains constant. In this fixed case, the supply curve is a vertical line. In contrast, the demand curve always has a downward slope due to the law of diminishing marginal utility. Sellers cannot charge more than the market will bear due to consumer demand in this process. Over time, suppliers can increase or decrease the quantity they supply to the market, so over time the supply curve tends upwards.
As the demand for supplier wages increases, the desire to produce and market at the same rate increases. It is not difficult to visualize that the supply curve and the demand curve will intersect at some point. At this stage, the market price is sufficient to induce suppliers to be willing to pay consumers at this price and to put the same quantity of product on the market. As a result, supply and demand are in balance.
Example of the law of supply and demand
Take for example the sudden increase in rainfall due to the change of seasons and the increased demand for umbrellas. This will lead to higher prices for umbrellas. Suppliers must work hard to meet this need. And when suppliers take a long-term view of this situation, they may need to change equipment and perhaps production facilities to meet demand.
When the demand or supply for a good changes, the demand or supply curve changes, even if the price remains the same. Changes in the demand curve mean that the original demand relationship has changed i.e. the demand for quantity is affected by some factor other than price. For example; If a product suddenly becomes the only product available for consumption, changes in the demand relationship will occur.