any type of Economy is base on the demand & supply theory. Even in labour market.
So what is demand & supply? Laymen need to understand the basic for it. As it applies to all sort of economy.
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer.
Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.
This video simply explains it.
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Examples of the Supply and Demand Concept
Supply refers to the amount of goods that are available. Demand refers to how many people want those goods.
- When supply of a product goes up, the price of a product goes down and demand for the product can rise because it costs loss.
- At some point, too much of a demand for the product will cause the supply to diminish. As a result, prices will rise. The product will then become too expensive, demand will go down at that price and the price will fall.
- Supply and demand should reach an equilibrium. A number of goods being supplied is the same as the amount demanded and resources are allocated efficiently.
Examples of the Law of Supply
- Corn crops are very plentiful over the course of the year and there is more corn than people would normally buy. To get rid of the excess supply, farmers need to lower the price of corn and thus the price is driven down for everyone.
- There is a drought and very few strawberries are available. More people want the strawberries than there are berries available. The price of strawberries increases dramatically.
- A huge wave of new, unskilled workers come to a city and all of the workers are willing to take jobs at low wages. Because there are more workers than there are available jobs, the excess supply of workers drives wages downward.
Examples of the Law of Demand
- A popular artist dies and, thus, he obviously will be producing no more art. Demand for his art increases substantially as people want to purchase the few pieces that exist.
- A cultural fad item that was all-the-rage for a period of time falls out of favour and is no longer “cool.” Demand for the item falls dramatically as it is no longer the must-have item of the season.
- A new restaurant opens up in town and gets great reviews. There are only 12 tables in the restaurant but everyone wants to get a reservation. Demand for the reservations goes up.
How the Law of Supply and Demand Works
- A company sets the price of its product at $10.00. No one wants the product, so the price is lowered to $9.00. Demand for the product increases at the new lower price point and the company begins to make money and a profit.
- The company could lower the price to $5.00 to increase demand even more, but the increase in the number of people buying the product would not make up money lost when the price point was lowered from $9.00 to $5.00. The company leaves the price set at $9.00 because that is the point at which supply and demand are in equilibrium. Raising the price would reduce demand and make the company less profitable while lowering the price would not increase demand by enough to make up the money lost.
Market forces are the factors that influence the price and availability of goods and services in a market economy, i.e. an economy with the minimum of government involvement.
Market forces push prices up when supply declines and demand rises, and drive them down when supply grows or demand contracts. When demand equals supply for a product or service, the market is said to have reached equilibrium.
Adam’s Smith’s ‘invisible hand’ referred to market forces
British moral philosopher and pioneer of political economy, Adam Smith (1723-1790), cited by many as the father of modern economics, wrote in his books about the ‘invisible hand’ that determined levels of supply, demand, the prices of goods and services, as well as wealth creation and distribution.
This ‘invisible hand’ represented market forces – supply and demand – and how if left to its own devices, an economy could thrive.
Mr. Smith’s influence spread across the world and is often quoted by economists who support the market economy.
Mr. Smith wrote:
“Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
In other words, the invisible hand is essentially a natural phenomenon that drives free markets through competition and scarce resources.
Market forces can push and pull either upwards and downwards or forwards and backwards. Prices are regulated according to the push/pull forces on demand and supply. In this context, backwards means the same as downwards, while forwards equals upwards.
According to Cambridge Dictionaries Online, market forces are:
“The forces that decide price levels in an economy or trading system whose activities are not influenced or limited by government.”
Examples of market forces
When Florida is hit by a cold snap, the price of orange juice across supermarkets in the United States rises. When the weather turns sunny and warm in Canada and the northern states of the US, the price of hotel rooms in Cancun and the rest of the Caribbean declines.
When major wars break out in the Middle East, the price of gasoline across the world rises, while the sale of large gas-guzzling SUVs drops.
What do all these events have in common? They all show how market forces affects supply, demand, and ultimately the price of goods and services.
Market forces determine how much of each good is produced, and at what price they go on the market.
If anybody wants to know how an event or policy will affect the economy, they must think first about how it might affect supply and demand.
Market vs. command economies
In so-called market economies, governments try not to intervene and allow market forces allocate resources. Prices bring supply and demand into equilibrium, and they guide decisions of producers and consumers.
In centralized economies (command economies), such as those today of Cuba and North Korea, and the Soviet Union when it had a communist system, the government tries to supplant these decentralized decisions with its own. In command economies, prices are not set by the market.
George Soros, a Hungarian-born American business magnate, investor, author, and philanthropist, said:
“If we care about universal principles such as freedom, democracy, and the rule of law, we cannot leave them to the care of market forces; we must establish some other institutions to safeguard them.”