Macroeconomics/Supply and Demand
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[edit] Markets
One of the most basic elements of macroeconomics is understanding markets. Markets are institutions or mechanisms that bring together demanders (people who wish to acquire a product) and suppliers (those that provide products) of particular goods, services, or resources. Markets can be local, national, or international - all that is required is the link between potential buyers and potential sellers.
In order to provide a simple explanation of supply and demand, let us focus on markets consisting of large numbers of independently acting buyers and sellers who wish to exchange a standardized product. This is a market where the buyers and sellers interact in such a way that market activity sets the price of the good. This is achieved when there are low barriers to entry and exit as supply changes to satisfy demand.
[edit] Demand
Demand is represented by a schedule or curve showing the various amounts of a good, resource, or service that consumers are willing and able to purchase at a series of possible prices, other things equal. It reflects the relationship between the possible price of a product and the quantity of product that the consumer would be willing and able to purchase at each price.
The Law of Demand is as follows: All else equal, as price falls, the quantity demanded for a product will rise whereas as the price rises, the quantity demanded for a product will fall. In other words, price and quantity have an inverse relationship. This can be gathered by common sense, if the price of a product is high, people will be less inclined to buy the product than they would if the price of the product was low. Conversely, if the price of a product is low, people will be more likely to purchase the product and more likely to purchase a higher quantity of the product than they would if the price of the product was high. This is partially due to the income effect, which indicates that a lower price increases the purchasing power of a buyer's money income, allowing the buyer to purchase more of the product than he or she could buy before. In addition to this, the substitution effect also contributes to this trend, indicating that as the price of the good falls, buyers have an incentive to substitute this good in lieu of other now relatively more expensive goods. For example, if the price of apples falls relatively to the price of oranges, the purchasing power of consumers increase for apples, causing them to substitute apples for oranges.
However, the Law of Demand is also subject to the Law of Diminishing Marginal Utility which states that in any specific period of time, each buyer of a product will derive less utility from each successive unit of the good consumed, which means that as price falls, the quantity of product consumed will rise at a decreasing rate.
