Impact of Demand and Supply on Price and Quantity Essay

Impact of Demand and Supply on Price and Quantity - Essay Example For ringing out the inverse relationship between price and quantity, we have to assume that other things are equal which means that all the factors, other than the price of the goods remain unchanged. This is called the ceteris paribus assumption. In the diagram, the line ABC is called a demand curve which shows the inverse relationship between the price and quantity demanded. The demand curve will always slope downwards to the right. The most important reason for the demand curve sloping downwards is the operation of the law of diminishing marginal utility. The law of diminishing marginal utility explains that the consumer will buy more and more of a commodity only at a lesser price. The term supply means the quantities of goods and services which a seller is willing and able to offer for sale at a price during a period of time. Thus, supply is always at a price, at a particular point of time and at a certain quantity. The law of supply states that other things being equal higher the price greater will be the quantity supplied by the producer and lower the price smaller will be the quantity supplied. There is a direct and positive relationship between price and quantity supplied.. ... LAW OF SUPPLY The term supply means the quantities of goods and services which a seller is willing and able to offer for sale at a price during a period of time. Thus, supply is always at a price, at a particular point of time and at a certain quantity. The law of supply states that other things being equal higher the price greater will be the quantity supplied by the producer and lower the price smaller will be the quantity supplied. There is a direct and positive relationship between price and quantity supplied. ABC is the supply curve. The relationship between the price and quantity supplied is depicted by the supply curve. When price remains constant producers or sellers may come forward to supply less or more at a particular price. This is referred to as a shift in supply. DEMAND INCREASES and SUPPLY INCREASES When both the demand and supply increases the quantity will not be much affected because an increase in demand will be met by an increase in supply. This situation mostly is found during the long period when the firm will have adequate time and resources to meet the increase in demand. In the long run, all the factors are variable. Under the long period, supply and demand fluctuate freely and they become equal. Therefore there will not be much increase or decrease in price and price will remain stable. During the long period, there is ample time for the firm to increase the capital for the expansion of plant and machinery to increase the quantity of output, according to the increase in demand. Therefore supply can be changed to meet the increased demand of any commodity.