Supply and Demand

The concepts of Supply and Demand as implemented in the real life.

By Jargalan Batsaikhan
Class 5Y

Economics is the study that deals with the best possible (efficient and simple) allocation of scarce resources. It is the branch of social science that deals with the production and distribution and consumption of goods and services and their management. In the following essay, I am going to be talking about how economic concepts such as supply and demand affect our lives because the understanding of economics is crucial to our modern society. I will talk about real life examples such as increase in the price of gasoline and the ensuing increase in the price of goods and the effect they have on the society.

Before we move on to discuss applications of economics in life, we have to expand on the terms that will be used such as demand, supply, law of demand, and law of supply. Demand is defined as the amount of specific good or service that a consumer is willing and able to buy at a given price at a given time period, ceteris paribus (i.e. Latin for all things remaining constant.) When there is no willingness or ability to buy a good, a person cannot buy it because without any desire for the product one wouldn’t want to waste resources by purchasing it. Furthermore, when there is no financial ability to back up one’s wants or needs, one cannot purchase goods that are needed. These two ideas are interdependent and cannot exist separately. Quantity demanded is the amount of goods that people are willing and able to buy at a particular price; however, Qd is not the same as the quantity that people would like to consume. There are two types of activity that can occur on demand curve and they can be differentiated by a change in quantity demanded and a change in demand itself. Movement along the demand curve is caused by a change in the quantity demanded which itself is caused by a change in price. The second activity possible is a shift in demand; it is caused by a change in demand, which in turn is caused by non-monetary factors such as population size, taste, and preferences, complements, substitutes and income level. The Law of Demand holds that all things remaining constant, the quantity demanded will increase as the price of the good decreases and decrease as the price rises. The relationship between price and quantity demanded is inverse though not necessarily proportional. The second part of the concept of supply and demand is supply. Supply can be defined as the amount that producers are willing and able to produce and offer for sale at a given price at a given time period, ceteris paribus. The relationship between price of a good and the amount supplied of that good is called the supply relationship. Supply is shown by the supply curve. The quantity supplied is the total amount of goods that all producers are willing and able to supply to the market at a given price at a given time. The kinds of activity that occur on the supply curve are the same as the ones that happen on the demand curve and they happen for a number of reasons. The Law of Supply is the total opposite of the Law of Demand because according to the Law of Supply as the price of a product increases the supply of that product increases. However, as the price of a product decreases, the supply decreases too.

As I have mentioned before, economics’ concepts such as supply and demand have a significant role in our everyday lives. A good example of the application of the concept of supply and demand is the demand for gasoline. As the price of gasoline goes up, the prices of other goods are also affected because as gasoline price increases, it indirectly affects almost all areas of economy. All goods are transported through either air, land, or sea and the vessels used to transport them are operated using gasoline and when the price of gasoline increases, the cost of transportation or cost of production for the producers if they transport the goods themselves increases. When the cost of production goes up, the producers cannot produce as much as they did before gasoline became more expensive and if they want to keep the supply stable then they would have to compensate for the increased cost of production by increasing the price of their goods. This takes care of the problem for the firms; however, it creates more problems for the consumers because then they would have to spend more money to buy necessities such as salt, sugar, oil, et cetera. This in turn increases the opportunity cost for the consumers because now they cannot spend as much money as before on goods that are not essential to survival.