Question

Considering your previous knowledge of the science behind the concepts of supply and demand; please explain how the concepts are interconnected and how one affects the other to achieve market equilibrium?

Answer 1

Demand curve describes the relationship between quantity demanded and the price. At higher price,the consumers demand less of good while at lower price the demand is higher. This shows an inverse relation between the quantity and price and hence the demand curve is downward sloping.

On the other hand, the supply curve is upward sloping. It shows the positive relation between the price and the quantity supplied. As the price increases, the sellers are willing to supply more of the good.

Both these markets are interconnected and their interaction forms the market equilibrium. At market equilibrium there is zero surplus and zero shortage ie whatever the consumers are demanding at a particular price are being fulfilled suppliers at that price and quantity.

If the current price is lower than the equilibrium price ,then the demand would be more and the supply would be less because there would be lower supply at a lower price which would create shortage of good. This would create an upward pressure on the prices leading to an increase in prices till the market reaches equilibrium.

The same is for higher prices. If the price is more than market equilibrium,then there is surplus in market and the prices would shift downwards till market equilibrium.

A number of factors are responsible for influencing the demand and supply like technological changes, change in tastes of consumers, cost of inputs, cost of substitutes etc.