Supply and Demand and Price Essay

Submitted By Sinead87
Words: 853
Pages: 4

Supply & Demand

The demand for housing is a function of income, price, demographics and the real cost of capital. Supply is determined by the profitability of building dwellings. Supply in the LR is a function of the amount people can borrow and a cost variable

The market price allows the quantity supplied to equal the quantity demanded, referred to as Equilibrium (E). Supply equals demand for a price.
Generalising from this simple relationship to an entire economy, aggregate supply (AS) equals aggregate demand (AD) at an equilibrium price and level of economic output.

Demand is the quantity that buyers wish to purchase at each conceivable price. As the price of a good/service increases, the quantity demanded decreases, other things equal, this is known as the law of demand. Demand describes the behaviour of buyers at every price & at a particular price there is a particular quantity demanded. Excess demand exists when the quantity demanded exceeds the quantity supplied at the ruling price. The demand curve shows the relationship between price & quantity demanded, other things equal. The other things relevant to demand curves are; the price of related goods (substitutes & complements), the income of consumers (inferior goods) & consumer tastes & preferences (convenience, custom & social attitudes) Any change in these factors will shift the demand curve.increase in demand shifts the DC to the right, increasing equilibrium price & quantity. Decrease in demand reduces eq price & quantity

Supply is the quantity of a good that sellers wish to sell at each possible price. The positive relationship between the quantity supplied and price, other things equal, is referred to as the law of supply. Excess supply exists when the quantity supplied exceeds the quantity demanded at the ruling price. The supply curve shows the relationship between price & quantity supplied, other things equal. The other things relevant to the supply curve are, technology available to producers(allows more outputs from the same inputs as before), the cost of inputs(labour, machines, fuel, raw materials) Government regulations Expectations Any change in these factors will shift the supply curve. Increasing supply shifts the SC to the right, increasing equilibrium quantity but reducing equilibrium price, reductions in supply, reduce equilibrium quantity but increase equilibrium price.

Government action may shift the demand/supply curves, but in a free market the gov makes no attempt to regulate prices directly. Free markets allow prices to be determined purely by the forces of supply/demand.
Price controls are gov rules/laws setting price floors/ceilings that forbid the adjustment of prices to clear markets

Opportunity Costs - the increase in production of a good/service requires that a cost or sacrifice be incurred. It is the cost of choice, when output, time, and money are limited.
Closely associated with OC is marginal revenue (MR) & marginal cost (MC). If a business has the opportunity to sell a single additional unit at a profit, it should produce it. The MR from the sale should exceed the MC to produce the unit. Enterprises should continue to produce until their MR equals their MC, at that point of equilibrium the MP on the next unit sold will equal zero. Past that level, the MR of each additional unit sold decreases and the MC increases.
The more units a business tries to push on the market, the less the market is willing to pay for these goods. The cost of producing one additional unit is