Supply and demand form the most fundamental concepts of economics that play a major role in impacting the Gross Domestic Product of the country. Whether you are an academic, farmer, or simply a consumer, the basic principle of supply and demand equilibrium is integrated into your daily actions.
Supply is the quantity of a commodity that producers wish to sell at various prices. Demand is the quantity that consumers wish to buy. The price of a commodity is determined by the interaction of supply and demand in a market. The resulting price is referred to as the equilibrium price and represents an agreement between producers and consumers of the good. In equilibrium, the quantity of a good supplied by producers equals the quantity demanded by consumers. If the supply and demand are not equivalent to each other, it results in economic disequilibrium. This further accelerates inflation, deflation and sometimes, hyperinflation!
The supply-demand model combines two important concepts: a supply curve and a demand curve. Let us see what these curves represent.
The Supply Curve:
The supply curve, labeled ‘s’ in the figure, shows the quantity of a good that producers are willing to sell at a given price. The vertical axis of the graph shows the price of a good, P, measured in dollars per unit. This is the price that the sellers receive for a given quantity supplied. The horizontal axis shows the total quantity supplied, Q, measured in the number of units per period. It also shows how the quantity of a good offered for sale changes as the price of the good changes. The supply curve is upward sloping: The higher the price, the more firms are able and willing to produce and sell. If production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price. The supply curve then shifts to the right (from S to S’). The supply curve is thus a relationship between the quantity supplied and the price.
The Demand Curve
The demand curve shows how much of a good consumers are willing to buy as the price per unit changes. The demand curve in the figure, labeled D, slopes downward: consumers are usually ready to buy more if the price is lower. The quantity demanded may also depend on other variables, such as income, the weather, and the prices of other goods. For most products, the quantity demanded increases when income rises. A higher income level shifts the demand curve to the right (from D to D’). The demand curve is thus a relationship between the quantity of a good consumers are willing to buy and the price of the good.