Hi folks! Business Economic article is back! And today we will discuss about one of the most fundamental concept. It is the glorious “Supply and Demand Theory”. Have you ever heard about this creature? For those of you who have economic background, this is your breakfast, lunch and dinner right!? So let’s begin!
The supply and demand theory is one of the basic concept we need to understand. Demand is “how much (quantity based) products or services wanted by consumers”. Quantity demanded is “how much products or services people are willing to buy or use at certain point of price”. Supply in the other hand is “how much products or services producers could offer to the market, and Quantity Supplied is “the amount of products and services producers are willing to make with certain point of price”. So, to be clear there are two points of view, in this case they are from the consumers in the demand area, and the producers in the supply area. Consequently, price is the reflection of both supply and demand. Let us brought you to this unique yet understandable concept.
First of all let us sink in with “The Law of Demand”. It stated that if other variable stays the same, the higher the price of a particular product will lead to less people who buy it, or we can say naturally people are avoiding buying things that keep on getting more and more expensive, because with the same purchasing power, they will get less and less product. This graphic below will help us understand.
As we can see, in point A when the price is 30, only 5 quantities are demanded. But when we see in point F when the price is only 5, there are 30 quantities demanded. So, to sum things up, demand and supply has a negative relationship, if price goes up the quantity demanded will fall and vice versa. Got it?! It’s super easy right?!
And now let’s continue to “The Law of Supply”. Similar to the law of demand, it reflects how much product will be sold at a particular price. But, if you guys recognize, the demand curve shows a downward slope, where supply curve is upward slope. Why? Because the graphic wanted to show that the higher the price, the higher product which producers are willing to supply and it has a direct connection with the company’s revenue. Let us pay attention to the graphic below.
As we can see, in point A (P1, Q1) compared to the point B (P2, Q2), P1 < P2, Q1 < Q2. As the price goes up, more and more quantity of a product are being supplied, because if the producers could sell more product in higher price, it will leads to higher revenue for the company. This is used by producers, not costumer. Again easy peazy right?!
And the final form is “The Supply and Demand Curve” where those curve are embedded in 1 graphic to understand how the market goes. Let us see the graphic, again… haha (>_<)
Notice something new? Yes! The “Equilibrium” point. What is this animal?! Equilibrium point is a time where supply and demand curves intersect each other. In other words, it happens where the price and quantity produced is the same as the price and quantity demanded by the customers, so everyone in the market are satisfied. Don’t think that equilibrium point is fixed, it obviously could change overtime depending on the market situation which affect supply and demand quantities.
For example, have you ever noticed especially in Indonesia prior, and during Ramadhan almost every groceries prices are rising steadily, sometimes it rises as sharp as a Kilimanjaro mountain. How could this phenomenon occur? It’s simple! Because the demand for those groceries is rising, and the supply of those items just couldn’t catch up so scarcity spreads everywhere which leads to higher price. When this phenomenon appears there are several ways to counter it, first is the natural way which is “let the market mechanism do their job”. Second is government intervention using market operations or, fixing the highest price for the goods. Remember economics is a very versatile area especially when it affects many people.
So thanks guys for reading this article! Hope it help you people out there and remember, Stay Awesome Fellas!! My quote for today is:
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