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ECON 2a SUPPLY AND DEMAND

I reserve the right to be wrong.



Supply and demand is the process by which people figure out the price, in money, for an exchange to take place. So supply and demand is the mechanism by which we discover what prices we can charge others if we're selling, or what we should fork out if we're buying. So supply and demand is people in a free market undertake 'price discovery'.



SUPPLY

This is the quantity of a product that is produced.
Oh myyy! What an uncurvy curve! Oh well, any line on a graph is apparently good enough to call a curve. Whatevs. 'But Matt!! Why is the price going up in line with quantity???' Well, this represents the increasing cost to get the products to market and so the desire to charge more to offset that cost.



DEMAND

This is the aggregate of all potential desire for a product. That is to say, this curve represents the potential market for whatever is being sold.
'But Matt, why is this one the opposive of the supply curve.' That is because the more plentiful a product is, the less valuable it becomes to individual customers, decreasing the price they are willing to pay for it.




HAPPY MIDDLE?

Finally, those two phenomena, supply and demand, must meet wherever buyers and sellers settle on a price; this we call the Equilibrium Price, where Market Equilibrium is to be found.

 To supply more than this would make each further unit produced less valuable and hurt demand, causing inventory to go unsold, whereas under-producing under exploits the opportunity, as customers' demand exceeds supply, leading competitors to enter the market and displace the current participants. This is the essence of market discipline, sticking to the laws of supply and demand because not doing so sentences the enterprise to potential financial losses and even destruction altogether.

All Production and Exchange (Econ 1a and 1b respectively) respond to supply and demand, causing production to ramp up in response to increased demand, and to decrease in response to falling demand.

Resources will be allocated according to where demand is seen to be either high or increasing, and diverted away from where demand is seen to be low or falling.

Graphs above are from  http://www.investopedia.com/university/economics/economics3.asp



On the next Ecomony Blogtime; Matt spends an hour talking about the black market in woollen socks!

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