Law of Demand and Supply in Microeconomics The supply and demand model in Microeconomics is a price determination model which establishes a relation between these two market forces in a perfectly competitive market. It says, everything else remaining equal, the price of a commodity will fluctuate until supply and demand find a point of equilibrium and the supply of any given commodity will be equal to its demand.
- Law of supply states that: Everything else remaining unchanged, the supply of a commodity will increase with the increase in its price and vice-versa.
- Law of demand states that: Everything else remaining unchanged, the demand of a commodity will increase with decrease in its price and vice-versa.
This simply states that Law of demand and the Law of supply will have a tug of war until they both find a point of equilibrium on the demand and supply curve. (See image below)
In the graph, the supply curve is rising from the price point of one to five and correspondingly the supply shifts from 10 units to 60 units. Contrary to the demand curve, which registers a fall in the demand with increase in it’s per unit price. The point of equilibrium is achieved when the supply and demand are equal in the market, in this graph, somewhere between 30 and 40 units of the commodity. At the point of equilibrium, both the parties, namely buyers and sellers are ready to transect at the given price.
There are four basic laws of supply and demand:
- If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
- If demand decreases (demand curve shifts to the left) supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
- If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price.
- If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.
Law of Demand and Supply in Microeconomics To summaries, a slight shift in the demand or the supply curve will disturb the equilibrium casing either a shortage or a surplus quantity available in the market. Demand and supply curve are disturbed by a lot of varying factors some of which are mentioned below
Factors affecting the Demand Curve:
- · Change in income
- · Change in preferences/taste
- · Change in prices of goods that are complimentary
- · Changes in prices of goods that are substitutes
- · Expectations
Factors affecting the Supply Curve:
- · Cost
- · Government tax policy
- · Weather/climate
- · Prices of substitute products
- · Number of producers
Each of these factors affects the equilibrium in the market, with varying intensities. In a perfectly competitive market where there are ample amount of buyers and sellers exist, this is the demand and supply model.