How does supply and demand affect the price of goods and services?

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02-06-2022
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How does supply and demand affect the price of goods and services?

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jcherry99 jcherry99 · Answer 1 · 2022-06-02T23:15:17-04:00

Answer:

Explanation:

Example

Let us take this slowly by considering a bicycle. You are given 1 bicycle and you wish to sell it. 4 people are interested and think your price is fair.

so the supply is 1 bicycle

and the demand is 4 people

If those people are want the bicycle equally, what do you think could happen to the price of the bicycle? Shouldn't it go up? Especially if they are all willing to make side deals.

Supply: 1 bicycle

Demand: 4 people

Price goes up.

Now go back.

Suppose you have 10 bicycles and only 8 people are bidding on them. They are not really that interested. So you have to lower the price until someone bites.

Supply: 10 bicycles

Demand: 8 people.

Price goes down. The supply exceeds the demand.

anna2023147 anna2023147 · Answer 2 · 2022-06-03T00:09:53-04:00

Answer:

See explanation!

Explanation:

To answer this question, let's first understand what would happen to prices if either supply or demand remained constant, whilst the other changed.

If supply remains constant, an increase in demand will result in higher prices. On the contrary, a decrease in demand will result in lower prices.

If demand remains constant, an increase in supply will result in lower prices, while a decrease in supply will result in higher prices.

This may make sense with a scenario:

All resources are scarce, so let's say a seller has one chair, and has one buyer. The chair would likely be sold for a pretty low price. However, if the next day, the seller still only had one chair, and this time had, say, 10 buyers, the chair would likely go much higher. This is because the seller now has more power, and the chair would be going to whoever is willing to pay the most, which likely isn't that original buyer.

On the other hand, if there were three buyer, and only one seller, the chair would have gone for a pretty average price. However, if there were the same three buyers with 10 sellers instead, each seller would have a lot less bargaining power, be forced to compete with each other, and hence sell the chairs at a much lower price.

This relationship may be better displayed with a graphical approach.

It's important to remember that in a basic supply and demand graph, the output is on the x-axis and price will be on the y-axis.

Demand will always be downward sloping, whilst supply will always be upward sloping.

The intersection of the two lines will be market equilibrium.

An increase in demand or supply can be modeled with a shift of the curves, in which you can play around and see what will happen to the market equilibrium of price.

An increase in demand will result in a rightward shift of the curve (more output at a given price) while a decrease creates a leftward shift. (less output at a given price)

An increase in supply is a rightward shift as well (more output at a given price) while a decrease is a leftward shift. (less output at a given price)

I hope that makes sense, please let me know if you have any questions!

Keywords:

Demand

Supply

Prices

Equilibrium

Law of Demand

Learn more about supply, demand, and equilibrium:

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