Economics and The Time Value of Money - Supply and Demand

Supply and demand defined
Supply and demand is a fundamental concept of economics and a backbone of a market economy.

  1. Demand - The quantity of a product or service people are willing to buy at a certain price.
    • Demand relationship - The relationship between price and quantity demanded.
  2. Supply - The quantity of a product or service that a market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price.
    • Supply relationship - The correlation between price and how much of a good or service is supplied to the market.

The Law of Demand
If all other factors remain equal, according to the law of demand, the higher the price of good, the less people will demand that good.
  • Demand relationship - The relationship between price and quantity demanded.

The Law of Supply
All other factors remaining equal, the law of supply states that higher the price, the higher the quantity that is supplied.
  • Supply relationship - The correlation between price and how much of a good or service is supplied to the market.

Equilibrium
This the point at which market supply and demand balance each other and prices become stable as a result.
  • In other words, the higher the price, the lower the quantity demanded. People will avoid buying a product that will force them to forgo the consumption of something else they value more.

    CHART
  • A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
  • The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good, the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).
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