Supply and Demand Schedules
The relationship between the number of goods supplied by the producer and the current market price is called the supply schedule. It is represented graphically by a curve. As the supply tends to be proportional to the price, supply curves are nearly always sloping upwards.
Thanks to the law of diminishing marginal returns, the supply curve’s slope is almost always increasingly upwards sloping. Due to the equi-marginal principle, a producer’s supply curve is almost always equal to the marginal cost curve of the producer. So an entire market’s supply curve can be seen as the sum of the individual procurers’ marginal cost curves.
It is true that on occasion, the supply curve will not slope in an upward fashion. One example of this is the backward bending supply curve of labor. As the wage of a worker goes up, the worker will generally be more willing to work harder and longer hours, as the increased wage makes the marginal utility of working go up – while also increasing the opportunity cost of not working.
If the wage of the worker gets too high, however, then the law of diminishing marginal utility might be experienced in relation to the worker’s wages. Since the worker is making a lot of money as it is, then further raises do not mean much to him. As a result, the worker does not work quite as hard, as he would rather spend his time relaxing rather than working. In non labor markets, the backwards bending supply curve has also appeared, such as in the oil sector. For example, shortly after the 1973 oil crisis, a lot o foil exporting countries decreased their domestic oil production as a result of oil’s sky rocketing prices.
The supply curve for utility production companies also tends to be unconventional. The supply curve of these firms tends to be depicted as a constant owing to the fact that the vast majority of their costs come in the form of fixed costs.
Another variance from the supply curve norm take places in those instances where child labor is involved – typically in third world countries. Supply increases as wage increases, until it gets to the point that the child is no longer allowed to work or stops working in order to focus on education. The supply in this case does not increase as the wage increases, until it gets to the point where the wage will be high enough to offset these concerns. In the case of normal demand curves, this might result in two stable equilibrium points – one for the high wage and one for the low wage.
Demand, on the other hand, can be thought of as economic need that is backed by buying power. Thus, the demand schedule, which is depicted on graphs as the demand curve, represents the amount of an item that purchasers are willing and able to buy at different prices, assuming that non price related factors remain stable. Demand, unlike supply, is nearly always sloping in a downward direction, because as the price goes up, customers will not buy as many units of the item. Demand curves are on an equal basis to marginal utility curves, just as supply curves are equal to marginal cost curves.
The primary determinants of demand include the item’s price, the income level, one’s personal tastes, the price of substitute items, and the price of free items.
The shape of the aggregate demand curve might be concave or convex, depending on the distribution of income.
On rare occasions, the demand curve might slope upwards. A good whose demand curve slopes upwards is called a Veblen good or a Giffen good.
Supply and Demand Elasticity
A key concept in grasping how supply and demand works is that of elasticity. It describes how supply and demand might be altered as a result of different stimuli. Elasticity can be defined as the percentage change in a variable divided by the percentage change in another variable. This is known as arch elasticity, as it calculates elasticity over a range of different values. Point elasticity, on the other hand, utilizes differential calculus as a determining factor when it comes to locating elasticity at a certain point. Elasticity is effectively a measure of relative changes.
It can be quite useful to know how much an item that has been supplied or demanded will change according to price fluctuations. This process is referred to as the price elasticity of supply and the price elasticity of demand. If a business intends to increase the price of an item, how will this impact their sales revenue? Will the increased unit price make up for the decrease in the volume of sales? If the government of the country in which the product is being sold decides to tax a particular item, effectively contributing to a price increase, will this have an affect on the amount that is demanded?
In addition to calculating the degree of elasticity, firms can also study the slope of their curves. This is not convenient, though, as this approach has units of measurement of quantity over the monetary unit. Take for instance, a comparison between the price of gas in Europe and the United States of America. There is a complicated conversion rate between the dollar and the euro. This is why economists tend to prefer using elasticity – the relative change in percentages.
Also, elasticity goes beyond the mere slope of the function – it presents the function’s slope in a coordinate space, as a line with a constant slope that has different elasticity depending on what point it is measured from.