Demand & Supply

Introduction

To explain different concepts and mechanisms, economists usually use “models”: a simplified representation of economic reality that allows us to understand and imagine the development of certain variables based on their link with others. The most widespread model in the economic discipline is the one that graphs the equilibrium of a market from the interaction of a supply function and a demand function.

Demand:

Represents the behavior of buyers and has behind it subjective issues linked to the preferences and possibilities of consumers. These include:

1. The price of the good

2. Needs and tastes of the population

3. Income level

4. Price of other goods (substitutes and complementary goods).

5. Expectations of future evolution

Demand curve:

The demand curve shows what happens to the quantities demanded of a good when its price varies, holding all other determinants constant. Since as the price increases, consumers are willing to demand fewer units of the good, the demand curve is negatively sloped.

Those factors that influence demand other than price will generate shifts in the curve. For example, when faced with an increase in disposable income, people will be willing to buy a greater quantity at the same price.

Supply:

Supply summarizes the production decisions of firms. Its behavior depends on technical and technological issues that determine the costs for profit maximization.

Among them, the following stand out:

1. Price

2. Technology

3. Costs and financing

4. Expectations

5. Market structure (competition)

Supply curve:

The supply curve shows what happens to the quantities offered of a good when its price varies, holding all other determinants constant. Since as the price increases, firms are willing to offer greater quantities of the good, the supply curve is positively sloped. Those factors that influence supply other than price will generate shifts in the curve. As an example, in the face of a technological change that increases productivity, the same product may be offered at a lower price.

Market equilibrium:

The point at which demand crosses supply establishes the equilibrium prices and quantities of a market. Demanders who are unable or unwilling to pay that price will be out of the market, as will suppliers who are unable to offer their product at that price.

Under certain conditions, market behavior will lead to equilibrium, since in the event of oversupply the natural actions of buyers and suppliers.