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EC102 Microeconomics


Supplyand demand topic is one of the most basic concepts of economics thatis used especially when dealing with a competitive market in aneconomy. A competitive market is a situation whereby there are manybuyers and sellers however, they do not determine the prices ofcommodities since prices are set by the forces of demand and supply.Demand is the quantity that consumers desire to buy at a certainprice. Demand relationship is how the quantities of a good and theprice relate. Supply is the amount of goods that a market can offer.Therefore, the amount supplied refers to the quantity of goods thatthe manufacturers are willing to offer at a particular price. Supplyrelationship is the way that price and quantities of goods that areoffered at the market correlate. The forces of demand and supply areapplied in the allocation of the scarce resources in an economy.Besides, the price is a determinant of both demand and supply.

TheLaw of Demand

Thelaw of demand states that if all other factors that influence demandare held constant, the higher the price, the lower it will be thedemand and the lower the price, the greater the quantity that will bedemanded (Varian, 2014). In this case, the amounts of goods that arerequired when the prices are high are usually low because theopportunity cost of these particular goods also goes up. This impliesthat consumers will be forced to forgo consumption of othercommodities to afford the goods whose prices are high. As a result,users will start avoiding such products and eventually the demandwill drop.

TheLaw of Supply

Thelaw of supply states that the amounts of commodities that suppliersare willing to offer at the market increases with an upward change inprices and decreases with a drop in the prices (Varian, 2014). Thisimplies that manufacturers produce more commodities when the pricesare high. The supplier will be willing to supply more goods to themarket when the prices are high because they will fetch higherprofits as compared to selling when the cost of commodities is low.

Relationshipbetween Supply and Time

Timeis a vital factor in supply unlike in demand. It implies thatproducers must take their time to assess the changes in prices thatoccur in the market (Rios et al., 2013). So, a sudden shift in theprices of goods should not always make manufacturers increase theirproduction perhaps by purchasing new machinery or hiring morelaborers. Suppliers should take the time to analyze whether thedemand that is causing an increase in price is permanent ortemporary. For example, suppliers should not rush to produce moreumbrellas by hiring more laborers because unexpected rain has causeda drastic increase in demand for the umbrellas. Instead, of hiringextra workers or purchasing new machinery, the producers should usethe manufacturing equipment intensively. However, if a countryexperiences a climate change, suppliers can be assured of a constantincrease in demand for umbrellas. Therefore, producers will expandtheir production plants and hire more workers to accommodate theincreasing demand of umbrellas.

Relationshipbetween Demand and Supply

Theassociation between supply and demand affects the prices of goods andservices in a competitive market. Neither demand nor supply iscapable of determining the prices of goods or services in an entirelycompetitive market alone (Rios et al., 2013). The following exampleexpresses the relationship between demand and supply. Assume that theMercedes Company has produced a new model saloon whose price is $20,000. According to the previous analysis, the company thought thatclients would not demand more than ten cars at a price higher than$20,000. However, if customers happen to require more than ten units,the prices will increase above $20,000. As a result, the company willbe willing to produce more than ten units to accommodate the highdemand and fetch higher revenues. Therefore, demand can influencesupply and supplies can also impact on demand.

Factorsthat Influence Demand

Tastesand preferences of the consumers determine the amounts of goods thatwill be consumed (Smutka et al., 2013). The demands for commoditieswhose consumers` tastes and preferences are high are likely to have asignificant demand. Besides, the demand for particular products willbe high if when their consumers` incomes increase. Demand is alsolikely to change when the prices of close substitutes decrease orincrease (Smutka et al., 2013). For example, if commodity A and B areclose substitutes, then, the demand for A will go up if the price ofproduct B increases.

Factorsthat Influence Supply

Thesupply of products in a market will increase if the number ofproducers augments (Smutka et al., 2013). Moreover, supply is likelyto go up if the prices of commodities increase. Firms can also expandtheir production units as a way of trying to increase supplies in themarket. Furthermore, supply can be affected by government taxes(Smutka et al., 2013). For example, supply will enlarge if the taxesare lowered since it will reduce the cost of production.


Rios,M. C., McConnell, C. R., &amp Brue, S. L. (2013). Economics:Principles, problems, and policies.McGraw-Hill.

Smutka,L., Rumankova, L., Pulkrabek, J., Benesova, I., Urban, J., &ampBelova, A. (2013). Development of determinants influencing sugarsupply and demand on world market on individual periods. ListyCukrovarnicke a Reparske (Czech Republic).

Varian,H. R. (2014). IntermediateMicroeconomics: A Modern Approach: Ninth International StudentEdition.WW Norton &amp Company.