Concepts such as supply and demand are key in the relationship between producers and consumers. The magnitude of demand can tell the manufacturer the number of commodity items that the market needs. The size of the offer depends on the volume of goods that the manufacturer can offer at a given time and at a given price. The relationship between producers and consumers determines the law of supply and demand.
Definitions
Demand characterizes the number of commodity items that buyers not only want, but can buy at different prices in a certain period.
The offer characterizes the number of commodity items that the manufacturer can offer the market at all possible prices in a certain period.
A function of a proposal is a law that shows the dependence of the volume of a proposal on external factors influencing it. Both price and non-price factors can influence the value of supply. Non-price factors include: the level of equipment of the enterprise, taxes, subsidies, subsidies, the existence of substitute goods, natural and geographical conditions, and others.
Types of supply and demand
Specialists distinguish a large number of types of demand, depending on various parameters. For example, depending on the intention of consumers, these types are distinguished:
- strict demand for a product that does not tolerate the replacement of goods even homogeneous;
- soft demand, which is formed by the buyer immediately before the purchase and allows the replacement of goods with a homogeneous one;
- spontaneous demand arises from the consumer suddenly already in the store.
It is also customary to single out individual demand - this is when the demand of an individual consumer is determined, as well as aggregate - the demand of the consumer market as a whole.
The offer is also divided into individual - the amount of goods that a single manufacturer can offer. The aggregate supply characterizes the general supply of manufacturers in the market.
Law of demand
The law of demand states that there is a direct proportion between the price of a product and the purchasing desire to purchase a product. The higher the value of a commodity item, the less demand for it, and, conversely, the lower the value, the higher the demand. Direct proportionality between price and magnitude of demand is directly related to concepts such as income and substitution effects. When the price goes down, the consumer can afford to buy a greater number of commodity items, due to this he feels himself to be a better off person - this phenomenon is called the income effect. Also, when reducing the price of a product, the consumer, comparing a more favorable price with others, tries to purchase this product in larger quantities, replacing it with those product items whose price has not changed - this is called the substitution effect.
The law of demand states that the volume of demand decreases or increases depending on the increase or decrease in the price of a commodity item, respectively.
For example, consumers create demand for goods worth 500 rubles. At some point, the manufacturer, seeing high demand, raises the price to 600 rubles. At this point, demand is declining, although supply has increased.
It is important to remember that one consumer's desire is not enough for demand, the consumer should also have the opportunity to purchase the desired product. When both desire and opportunity are combined, demand arises.
The consumer’s desire to buy a Bentley Continental car does not mean there is a demand for this car if the consumer does not have a high income to buy this car. Even if the consumer visits the salon every day for a consultation, the demand will not change.
The law of demand states the existence of these mechanisms that affect the market for relations between producers and consumers:
- the law of diminishing marginal utility;
- effect of income and substitution.
The effect of income and substitution is discussed above. The law of demand says that the concept of diminishing marginal utility is proved by the fact that each subsequent consumption of an additional unit of good brings the consumer a lower level of satisfaction, and therefore he will be ready to buy it only at a lower price.
Limitations
The law of demand is limited to:
- if there is a stir on the goods caused by the expectation of consumers to increase prices;
- if an expensive and unique product is considered, as well as a product, by purchasing which, the consumer wishes to make it a means of accumulation (antiques);
- if consumers switched their attention to newer and more modern products.
All factors presented above are divided into price and non-price factors limiting the law of demand.
The law of supply and demand
The law of supply and demand states that there is a direct proportionality between supply and demand. Having looked at the intersecting supply and demand lines on the graph, it becomes clear: the lower the price per unit of goods, the more consumers want to buy it, but the less the consumer is ready to sell the goods. Charts of supply and demand lines have a point of intersection, it shows an equilibrium price.
Based on this, the law of demand states that sellers will offer more goods at a higher price. If the price decreases, the supply will also decrease. It is the equilibrium price (or the intersection point of the supply and demand graphs) that shows at what price and in what quantity the product will be presented. These indicators will satisfy both parties: manufacturers and consumers.
Labor demand
The law of demand for labor says about the dependence, which is how much labor resources the producer is ready to take at work at a certain wage rate.
The magnitude of the demand for labor depends on such factors:
- level of labor productivity;
- the need for labor to meet the needs of production.
There is also a direct proportion between the size of wages and the demand for labor. The law of demand says: the lower the wage, the higher the demand.