Supply Demand

Supply, Demand, and Price Elasticity

University of Phoenix

Supply, Demand, and Price Elasticity

In these economic times, it sometimes helps to understand just what drives the market. One day the gas prices jump up about 25 cents a gallon, the next week, the prices fall by five cents a gallon. The price of milk can vary by the month. This is due to the concept of price elasticity. The market is also driven by supply and demand which is the amount of a product that is available and the desire for that particular product. Other factors include market equilibrium and market systems. All of these pieces fit into the puzzle of economics.

Supply and Demand

Supply and demand represents economic market activity between sellers and buyers. Sellers measure their activity by supply which pertains to goods, products and services introduced into a market. Demand has to do with buyers within the market and their desire to consume or use certain goods, products or services.

Changes in supply occur when cost of input rise, demand decreases and profitability decreases. Supply tends to rise as profitability and revenues increase. Supply has to do with the number of units available to meet the market demand and maintain price equilibrium. Other changes in supply occur with efficiencies in technology, regulation, competition and expectation.

Demand has to do with the desire a group of buyers has for a particular product, good or service. A change in price can cause a movement along the demand curve. The measure of responsiveness to price is calculated by determining the price elasticity of demand. Other changes in demand can be change in consumer preference/taste, change in consumer income, population and expectation.

Changes in supply and demand are normally generated from several root causes. The law of supply and demand is the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that...