The Basics of Supply and Demand in Economics Explained

Concept of Demand and Supply for Dummies 

The concept of Demand 

In our daily life, the term demand means the urge or desire to want something.

For example, Radha demanded that she'd only buy coffee beans from Brazil for her morning coffee. In economics, this would be considered wistful thinking when you desire to buy a commodity but have no means of getting it, e.g., money. Hence, it would remain a desire and not be called a demand.

In economics, demand is only when your desire is backed up with sufficient purchasing power or the want and willingness to spend on the commodity. For example, Radha wants to buy a car, and she has taken a loan to buy the car. She goes to the showroom to pay for it. This is a demand when you have all the means to get what you desire; that's when a desire turns into a demand.

A demand schedule is a table showing different quantities of commodities to be purchased at different prices. A demand schedule has two sub-schedules. An individual demand schedule and a market demand schedule. 

An individual demand schedule shows the demand of an individual consumer for a commodity in the market. For example, the schedule shows how much Radha is willing to pay for Brazilian coffee beans at a particular point in time. Determinants of the individual demand function are the own price of the commodity, and
the price of related goods- substitute and complementary goods. (Substitute goods are, for example, tea and coffee, ball-pen and ink-pen, these are goods that substitute each other- an increase in the price of tea increases demand for coffee and vice versa. Complimentary goods that compete with each other, for example, pen and ink, bread and butter- a fall in the price of pens will increase demand for ink, and vice versa.) , the income of consumers' tastes and preferences and expectations.

A market demand schedule shows the demand for a commodity for all consumers in the market. For example, it shows how much all consumers in the market are willing to pay for a commodity at that point in time. Determinants of the market demand schedule are- the number of buyers and the distribution of income.

The concept of Supply

Supply refers to the various quantities of a commodity a producer wishes to sell at different possible prices of the commodity. 

A supply schedule shows the different quantities up for sale at different prices at that specific point in time. A supply schedule has two sub-schedules- an individual supply schedule and a market supply schedule. 

An individual supply schedule shows the different quantities of a commodity an individual firm is selling at different prices.

A market supply schedule shows the different quantities of a commodity that all the firms in the market are selling for at different prices at that point in time.

Determinants of supply are-

• Own price of the commodity- ex, higher the price, higher the supply. vice versa.
• Price of related goods—for example, if the price of tea increases, the firm will sell the same quantity of tea at a higher price, and vice versa.
• Number of firms in the industry- an increase in the number of firms will lead to an increase in market supply. vice versa.
• Goal of the firm- is to maximise sales.
• Price of factors of production—for example, if the factor price decreases, then supply decreases, and the commodity is sold for more at the existing price, or vice versa.
• State of technology- advancement of technology leads to less production cost.
• Expected future price- ex, a price rise is expected in the future the current supply of the commodity will decrease.
• Government policy- a tax increase may decrease supply and an increase in subsidies may increase it.