supply and demand (redirected from Interrelated supply)

supply and demand, in classical economics, factors that are said to determine price, by correlating the amount of a given commodity producers hope to sell at a certain price (supply), and the amount of that commodity that consumers are willing to purchase (demand). Supply refers to the varying amounts of a good that producers will supply at different prices; in general, a higher price yields a greater supply. Demand refers to the quantity of a good that is demanded by consumers at any given price. According to the law of demand, demand decreases as the price rises. In a perfectly competitive economy, the combination of the upward-sloping supply curve and the downward-sloping demand curve yields a supply and demand schedule that, at the intersection of the two curves, reveals the equilibrium price of an item. Theories of supply and demand had their roots in the early 20th cent. theories of Alfred Marshall, which recognized the role of consumers in determining prices, rather than taking the classical approach of focusing exclusively on the cost for the producer as a determinant. Marshall's work brought together classical supply theory with more recent developments concentrating on the utility of a commodity to the consumer (see value). More recent theories, such as indifference-curve analysis and revealed preference, offer more flexibility to the supply and demand theories created by proponents of marginal utility. The theory of elasticity is significant as well: it shows how certain commodities will bear a substantial rise in price if there is not an equitable substitute available, while other easily replaceable commodities cannot do so without losing business to competitors. See also competition.

Bibliography

See L. Klein, The Economics of Supply and Demand (1983); K. Cuthbertson, The Supply and Demand for Money (1985).

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supply and demand

Relationship between the quantity of a commodity that producers have available for sale and the quantity that consumers are willing and able to buy. Demand depends on the price of the commodity, the prices of related commodities, and consumers' incomes and tastes. Supply depends not only on the price obtainable for the commodity but also on the prices of similar products, the techniques of production, and the availability and costs of inputs. The function of the market is to equalize demand and supply through the price mechanism. If buyers want to purchase more of a commodity than is available on the market, they will tend to bid the price up. If more of a commodity is available than buyers care to purchase, suppliers will bid prices down. Thus, there is a tendency toward an equilibrium price at which the quantity demanded equals the quantity supplied. The measure of the responsiveness of supply and demand to changes in price is their elasticity.