The Concepts of Supply and Demand
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The interaction of supply and consumer demand is significant to consumers because the interplay of these two forces typically sets the price of a good or service. As one economist notes, "The resultant market price is dependent upon both of these fundamental components of a market" (How, 2008, p. 1). When buyers and sellers agree on a price, what is known as the "equilibrium price," and exchange of goods or services occurs (How, 2008). For consumers and sellers, the law of supply and demand is a rule of thumb that holds true in the market. As one financial analyst defines the law of supply and demand, "Other things being equal, price and the quantity demanded are inversely related" (Supply, 2008, p. 1). This means the greater the demand for a product or service the higher the price and the lower the demand for a product or service the lower the price. "Other things being equal" refers to factors that can affect demand, such as the availability of substitute goods or changes in consumer tastes. This analysis will provide a discussion of how supply and demand affect consumers, especially with respect to price, availability of goods or services, and substitute goods or services. A conclusion will apply the law of supply and demand to a contemporary market issue that has affected consumers. In the law of supply and demand, the quantity demanded is distinct from demand, which "refers to the entire relationship between price and the quantity demanded" (Su
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2009, p. 40). Chicken and beef or Pepsi and Coke are examples of substitute goods. Consumers will remain loyal to Coke only so long as it does not raise its price to the degree where consumers are just as satisfied substituting Pepsi for a lower cost. Complements are goods for which "an increase (decrease) in the price of one goods leads to a decrease (increase) in the demand for the other good" (Baye, 2009, p. 40). Beer and peanuts are a good example of complements. If the price of beer increased, most beer drinkers would reduce their consumption of peanuts.
Demand is so significant to supply that demand management is a field that has emerged in operations management. According to Chase, Jacobs, and Aquilano (2006), "The purpose of demand management is to coordinate and control all sources of demand for the productive system can be used efficiently and the product delivered on time" (p. 512). Sellers will try to sell at a price that is above the equilibrium price in order to earn greater profit margins, but not at such a high price that competition will enter the market or consumers will turn to substitutes. Changes in supply and demand can be short- or long-term in nature. Changes in supply from weather, like
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Approximate Word count = 1329
Approximate Pages = 5 (250 words per page)
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