It is used as a starting point to much more advanced economic models and theories.
Supply is "the quantity that producers are willing to sell at a given price." (Supply and Demand, 2006). Supply depends on the market price of the good and the production costs. Demand, on the other hand, is "the quantity of a good that consumers are not only willing to purchase but also have the capacity to buy at the given price." (Supply and Demand, 2006). It depends on the willingness to buy according to the price of the good, the level of income of the buyer, personal tastes, the price of substitute and complementary goods.
There are mathematical methods to show the relationship between supply and demand such as equations and graphs. The mathematical methods are used to get a better understanding between the sellers and the buyers. The following is a simple graph of supply and demand curves:
The slope of the supply curve is upwards to the right and it means that as the price goes up, the producer will be willing to produce more. The slope of the demand curve is downwards to the right and it means that a greater quantity of goods will be demanded when the price goes down. The point where the supply and the demand curves intersect is the equilibrium point.
When the demand curve shifts, we have the following graph:
In the case that more buyers want to buy some goods, the quantity demanded at all prices will tend to increase. The increase in demand can happen due to changes in taste. This can be "represented on the graph as the curve being shifted right, because at each price point, a greater quantity is demanded. () Conversely, if the demand decreases, the opposite happens." (Supply and Demand, 2006).
When the supply curve shifts, we have the following graph:
In the case that the seller’s costs change, then the supply curve will shift. "Notice that in the case of a supply curve shift, the price and the quantity move in opposite directions. () Conversely, if the quantity supplied decreases, the opposite happens." (Supply and Demand, 2006).
In some cases the supply curve is vertical: it means that the quantity supplied is fixed, no matter what the market price. A clear example of this case is the amount of land in the world that can be considered to be fixed.
Wikipedia defines elasticity in the following way: "In economics, elasticity is the ratio of the incremental percentage change in one variable with respect to an incremental percentage change in another variable." (Elasticity, 2006). This is very important concept in order to understand the behaviour of supply and demand in the market. There are different kinds of elasticity.
There is arch elasticity which calculates the elasticity over a range of values. There is also point elasticity which uses differential calculus. In general, elasticity is a measure of relative changes in supply and demand reflected on price in the market.
An example of elasticity happens we it is considered to know what happens to the buyer’s demand for a product when prices increase. Buyers will usually buy less of that product, they can consume it less or they can substitute it for another product. "The greater