Theory of supply and demand: essence, characteristics, basic concepts

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The theory of supply and demand is the basis of the market model that prevails in most developed countries. The relative simplicity of formulations, visibility and good predictability have led to the fact that this concept has gained immense popularity among scientists and economists around the world.

The foundations of the theory of supply and demand were laid down by the famous market economy apologists A. Smith and D. Ricardo. Subsequently, this concept was supplemented and improved until it acquired a modern look.

The theory of supply and demand is based on several basic concepts, the key among which are, of course, supply and demand. Demand is a significant economic value that characterizes the need of consumers for a particular product or service.

Scientists identify several classifications of demand. For example, there is individual demand, that is, the need of a particular citizen for a particular product in the market in question, andaggregate, that is, the total amount of demand for certain goods and services in a particular country.

In addition, demand is primary and secondary. The first is the need for a well-chosen category of goods in general. Secondary demand indicates interest in the goods of a particular company or brand.

The theory of supply and demand defines the latter as the amount of goods on the market at a particular point in time that producers are willing to sell. At the same time, it should be noted that supply, like demand, can be individual and aggregate, and the latter type implies the total volume of goods offered in a particular country.

The main factors of supply and demand can be divided into several groups. The first should include those that do not directly depend on the activities of buyers and producers. This is, first of all, the general socio-economic situation in the country, the state policy in the sphere of production and consumption, competition, including from foreign organizations.

Internal factors include how competitive a given manufacturer's products are, how competent pricing and marketing policies are, as well as the level and quality of advertising, the level of income of citizens, changes in such indicators as fashion, taste, addictions, habits.

The main laws on which the theory of supply and demand is based are the laws of precisely these economiccategories. Thus, the law of demand proclaims that the quantity of a commodity, under certain constant conditions, increases if there is a decrease in the price of this commodity. That is, the quantity demanded is inversely proportional to the price of the good.

The law of supply, on the contrary, establishes a direct relationship between supply and price: under certain constant conditions, an increase in the price of a product leads to an increase in the number of offers in this market.

Demand and supply are not separated from each other, but are in constant interaction. The result of this process is the so-called equilibrium price, at which the demand for this product fully corresponds to the supply.