About supply and demand

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In a market, the cost of goods and services can be calculated in a variety of ways. In a nationalized economy, the state and government are primarily responsible for determining the costs of goods and services. Such markets are so enclosed and protected that the state retains complete control of all that occurs within the system. In a liberalized economy, however, the market dynamics of supply and demand control the prices of all services and commodities. In such cases, the economy is left to self-regulate, with the government's job being to provide an enabling atmosphere for economic activity to prosper. Since most of the economies are liberalized, the concept of demand and supply has raised a lot of interest, with various scholars arguing of its benefits, while some critiquing the whole concepts as based on many assumptions. In this paper, focus is leveled on describing the whole concept of demand and supply, with particular interest laid on the literature review of various scholarly works done on the concept and a brief insight of how supply and demand interplay to reach an equilibrium.

Literature Review

The forces of demand and supply cannot be ignored, more so in a liberal market. Scholars have argued that for perfect management of infrastructural resources, then versatile and flexible supply chain structures are needed to face the challenging demand chain needs all through the operation process in order to support continuous adjustments to the changing markets (Nutt, 2004). Nutt recognizes the importance of businesses and firms to restructure their supply chain in that at no point should the market face shortages or surplus. To him, this has the salient effect of helping the firm adjust to the changing markets and keep up with the competitors. He thus identifies the importance of equilibrium in the market; for it is only then that the firm is not susceptible to loss or any uncertainty.

Economic Analysis of Supply and Demand

The intertwined relationship between demand and supply cannot be ignored. This relationship largely determines the forces behind the allocation of resources and important decisions in the business. The relationship between supply and demand is based on several laws and assumptions. These laws include; the law of demand, that of supply, and the assumption of equilibrium.

The Law of Demand

Demand is generally viewed as potential consumers’ willingness and ability to buy a commodity. It implies that for there to be demand, the potential consumers must be willing and have the capacity to afford the product (Hayes, 2017). This definition automatically leads to the law of demand, that goes, “all other factor kept constant, then the higher the price of a good/service, the lower the demand.” The argument here is that as t price of a product increases, the opportunity cost also increases; and as such, people will reduce the number of goods they purchase.

Law of Supply

Supply, on the other hand, is the quantity of services and goods producers are able and willing to expose to the market at a certain price unit. It implies that producers’ willingness and ability to produce any particular good or service are pegged on the market price for that particular good (Hayes, 2017). Generally, the law of supply states that the higher the price, the higher the quantity supplied.

Equilibrium: When both demand and supply are equal, then it is said that the economy is at rest or equilibrium. An equilibrium state is where the demand unit intersects with the supply unit. At this point, both the supplier and the consumers seem to be satisfied in that the suppliers are selling all their goods and services at a specific price, while consumers are receiving all the goods they need at a price they are able to afford.

When the demand function does not intersect with the supply function, then there exists disequilibrium. Disequilibrium can be brought about by other factor such as excess supply or excess demand.

Conclusion

Generally, what stands out throughout the discussion is how the forces of supply and demand can determine prices of goods and services in the market. As Nutt (2004) points out, effective balance and management of demand and supply are necessary for helping firms adjust to the ever changing and unpredictable market environments. However, in as such as the firm strives to attain equilibrium, what manager should not is that attaining equilibrium is based on many assumptions, which are very risky to ignore at times. For instance, consumers’ tastes and preferences might change allover sudden to the extent that even a decrease in price no longer entices them to purchase the product. It is therefore prudent to put other factors into consideration when trying to attain equilibrium.

References

Hayes, A. (2017). Economics Basics: Supply and Demand, Investopedia, Retrieved on August 27, 2017 from http://www.investopedia.com/university/economics/economics3.asp

Nutt, B. (2004). Infrastructure Resources: Forging Alignments between Supply and Demand, Facilities, 22(13/14), 338-343

November 09, 2022
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