Theory of Demand and Supply
This section discusses the pivotal concepts of Demand and Supply, fundamental to economic theory and market operation. Demand is defined as the quantity a consumer is willing and able to purchase at a certain price within a specific time frame. Two types of demand are identified: individual demand, which is the demand from a single consumer, and market demand, which aggregates the demands of all consumers.
Key principles include the Law of Demand, which states that, ceteris paribus, a decrease in price results in an increase in demand, and vice versa. This inverse relationship is visually represented through a demand schedule—a table of quantities demanded at various prices—and a downward-sloping demand curve.
Factors affecting demand include the commodity's price, consumer income, prices of related goods (substitutes and complements), consumer preferences, population size, and future expectations. Similarly, supply is defined as the quantity a seller is willing to sell at a given price and time. The Law of Supply indicates that, with all else constant, an increase in price results in an increase in supply.
Furthermore, the elasticity of demand and supply measures how responsive quantity demanded or supplied is to changes in price, categorized into elastic and inelastic types. Understanding these concepts is essential for analyzing market behavior and making informed economic decisions.