The Law of Demand and the Law of Supply

The difference between the law of demand and the law of supply

Difference between demand and supply

According to Bullock (2007), demand is the amount of a good or service that the buyers are willing and able to buy at a specific time. The amount or quantity demanded means the amount that buyers are willing to get at a particular price and by relating amount demanded with the price, the demand relationship is derived. Supply, on the other hand, is the amount that is available to the buyers at a specific time (Bullock, 2007). It is that amount which producers are willing and able to supply at a particular price during a certain period of time. Supply relationship is also obtained when the quantity to be supplied is related to price.

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Difference between the law of demand and the law of supply

By using the supply and demand relationships the law of demand and supply may be distinguished as follows: The law of demand states that, the higher the price of a commodity (or service) the lower the demand for the commodity; and the lower the price, the greater the demand. This is because as the price of a good goes up, people tend to forego that good for another, so the opportunity cost for the commodity goes up as its price increases. This applies when all other factors are assumed constant (Giesbrecht, 1997).

The law of supply states that, the higher the price of a commodity or service, the greater the supply of the commodity or service; and the lower the price, the lower the supply (Giesbrecht, 1997). This is because producers will be willing to produce more when prices are high so that they earn more revenue. This also applies when all other factors are held constant.

Hence, in the law of demand, demand is inversely proportional to price and a demand curve is normally downward sloping. In the law of supply, supply is directly proportional to price and the supply curve is upward sloping (Clayton, 1997).

When do equilibrium, shortages and surpluses occur?

Bullock (2007) points out that, the relationship between demand and supply brings about the concepts of equilibrium, shortages and surpluses. When the price of a commodity is, for instance, low there will be greater demand but this will mean less supply because producers will be unwilling to produce at low prices. Low supply will then result in more people demanding goods than those which are available in the market and prices will go up due to the high demand. The reverse will happen when the price is high.

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Equilibrium

The market economy is said to be in equilibrium when both the supply and demand are equal. By relating both supply and demand with price, graphically, the point where the supply curve intersects with the demand curve is the point of market equilibrium (Bullock, 2007). At this point the number of goods supplied is equal to the number of goods demanded and the market is said to be most efficient at this point.

Shortage

This occurs at market disequilibrium position and it is when the quantity demanded is higher than quantity supplied (Bullock, 2007). When the price of a commodity is below the equilibrium price, the suppliers will produce less while more people will be demanding the commodity. At a low price, producers will be willing to produce only a certain quantity while the demand will be high, but the shortage will eventually push prices up because of the high demand and producers will want to supply more hence bringing the price close to the equilibrium price.

Surplus

According to Clayton (1997), when prices are very high, there will be less demand for commodities while the producers will supply more to earn more revenues. This will mean that there will be excess supply in the market as the buyers are less willing to purchase the goods at high prices and the suppliers are producing more with the expectation of making greater profits.

Changes in demand Vs changes in quantity demanded

Unlike change in quantity demanded, change in demand does not apply the concept of the demand relationship. Change in demand occurs when demand for a commodity is affected by any other factor other than price. For instance, when the government puts restrictions on the amount of beer that people are to consume this will reduce the demand for beer at the same price. Hence the demand curve will shift downwards and there will be less demand at the same price of the commodity (Giesbrecht, 1997).

On the other hand, change in quantity demanded takes place when the price of commodity changes. It applies the concept of demand relationship and when the price goes up, the quantity demanded changes and people demand less and when the price is down, the demand changes such that people demand more (Clayton, 1997). According to Clayton (1997), a change in quantity demanded results in a change along the demand curve and it shows the change in both the price and the quantity demanded from one point of the demand curve to another.

Therefore, Giesbrecht (1997) notes that, change in demand is brought about as a result of other factors other than price while change in quantity demanded is as a result of change in the price of a commodity. Other factors that may lead to a change in demand include: change in the income of the consumer, change in the size of the market, change in consumers’ tastes and preferences, change in the price of substitute or complementary goods, among other factors (Giesbrecht, 1997). When determining change in quantity demanded, these factors are normally held constant; and while determining the change in demand, the price of the commodity is held constant.

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Works Cited

Bullock, C. Introduction to the Study of Economics: California; University of California, 2007.

Giesbrecht, M and Clayton, G. A Guide to Everyday Economic Thinking: California; McGraw-Hill, 1997.

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