Demand and Supply- Or Supply and Demand

The economic meaning of demand is that a consumer is both willing and able to purchase a good or a service, and not that he or she merely wants, desires, or needs that good or service. Like wise, the term supply means that a firm is both willing and able to produce a good or a service.

Individual consumer demand and individual firm supply are defined at a particular moment in time. This method of definition holds all variables constant except for the quantity and price of the good or service being studied. The functional relationships of demand and supply relate the respective quantities to the respective prices, while all other variables are held constant.

Demand curves have negative slopes, which means that the variables of price and quantity demanded change in opposite directions. The first reason for this relationship is the income effect, or the effect that a change in a person's real income (brought on by a change in the price of a good) has on the quantity that he or she demands of that good. The second is the substitution effect, or the effect that a change in relative prices of substitute goods (brought on by a change in the price of a good) has on the quantity demanded of that good.

Supply curves have positive slopes, which means that the variables of price and quantity sup plied change in the same direction. The reason is that firms find it profitable to commit more re  sources to the production of a good or a service when its price is higher and less when its price is lower, other things being equal.

Changes in the quantity demanded and in the quantity supplied are reflected as movements along their respective curves, whereas changes in demand and supply are reflected as shifts of the curves. A movement along a curve is caused by a change in the price of the good or service being studied. A shift of a curve occurs when the ceteris paribus assumption is relaxed. Demand curves shift when tastes, income, or prices of other goods change. Supply curves shift when input prices, technological know-how, expectations about the prices of other goods that the firm is or could be producing, or a seller's goals change.

Market demand and market supply are derived by adding up, at each possible price, individual consumer demands and individual firm supplies of a particular good or service in a certain place over some period of time.

When market supply is greater than market demand, there is excess supply, causing supplier firms to compete with one another and thereby driving down the price. When market demand is greater than market supply, there is excess demand, causing buyers to compete with one another and thus driving up the price. In a market, when quantity demanded is equal to quantity supplied, there is a state of balance-the equilibrium price and the equilibrium quantity have been reached.

Markets are sometimes manipulated by buyers or by sellers. This manipulation may result from a collusive agreement. Buyers may shift the market- demand curve to the left, thereby achieving a lower equilibrium price. Sellers may shift the market- supply curve to the left, thereby achieving a higher equilibrium price.

Disequilibrium in a market is the condition in which quantity demanded is not equal to quantity supplied. It may arise as a temporary situation, or it may be maintained by government action. Government may impose a higher- than- equilibrium price, which will be marked by excess supply, or a surplus. Or the government may impose a lower-than-equilibrium price, which will be marked by excess demand, or a shortage.