This is a short video briefly explaining the concepts demand and supply. Demand and supply and are two important economic concepts that need to be understood. Some may argue that they are the two most important economic concepts.
What is demand?
Demand is determined by a person’s willingness and ability to pay for a good or service. Demand is also typically subject to diminishing marginal utility. This means that the more a person has of something the less they are willing to pay to obtain more of it. For example, you might be willing to pay a lot of money for an apple when you are very hungry. After you have bought and eaten a few apples you are not willing to pay as much money for the next apple. There may even come a point where you will even turn down free apples. This is why demand curves are generally downward sloping.
What is supply?
Supply is the amount of a good or service that the producers of the good or service are willing to provide at a particular price. As the price increases the producers are willing to produce more and/or new producers will enter the market to take advantage of the higher price. This is why supply curves are generally upward sloping.
Equilibrium
The theoretical equilibrium is achieved when demand equals supply. This is the point where the demand curve intersects with the supply curve. At this intersect, the equilibrium price and quantity are determined.
In reality, equilibrium cannot be easily determined. Incomplete information regarding people’s preferences and incomplete information regarding each firm’s cost structure makes it impossible to determine exactly where equilibrium is. Changing preferences, tastes, technology, competitors, and legislation also means that the theoretical equilibrium is constantly shifting.
What to take away from the video
Demand and supply are important concepts. They can be used to provide an idea of potential price changes. The concepts of demand and supply are a little simplistic to fully explain how markets operate. Demand and supply are used to determine a theoretical partial equilibrium. That means only one market is investigated at a time. In reality. Many markets are interrelated and effect each other; general equilibrium theory explains how these markets interact and the effects of this interaction. Simple demand and supply analysis is rarely sufficient to determine accurate movements in price and quantity but still quite provides a general idea of the relationship between price and quantity, which is still important.
Are demand and supply the most important concepts in economics?
This is very subjective, different people will give you different answers. Almost all economists will agree that the concepts of demand and supply are important but not all will agree that it is the most important. What other concepts might be considered more important? I personally feel there are many other concepts just as important as demand and supply if not more important. These concepts include utility, efficiency, choice, factors of production. These concepts feed into demand and supply. Demand and supply is one way of representing these concepts. These concepts also hold value in their own right and provide other implications other than price and quantity effects.
For more information on demand, supply, and equilibrium
Demand, supply, and equilibrium post can be accessed using the following link:
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