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THE LAWS OF SUPPLY AND DEMAND
Production decisions are based on demand for goods and services. Supply of goods and services is dependent upon demand for the same. Why do movies that are much more popular stay at theaters longer than those that aren’t as popular? Demand for the movie causes the theater operators to supply the showings that the consumer wants. Why does the room rate in a convention hotel go down on weekends? There is less demand on weekends because most convention goers leave on Friday or Saturday and others don’t arrive until Monday, so the supply of available rooms goes up. Hotel operators try to create more demand for their vacant weekend rooms by lowering prices.
The law of demand states that during a specific time period the quantity of a product that is demanded is inversely related to its price, as long as other things remain constant. The higher the price, the lower the demand; the lower the price, the higher the demand. Don’t confuse demand with wants. Consumers have unlimited wants, as was established at the beginning of this discussion. Nor are demands and wants the same as needs. A consumer may need to have a crown put on a tooth but may not want to have it done because of the high cost. At some point, the suffering patient may demand the services be provided regardless of the price.
Often when prices are too high and demand for a product or service lessens, it is because consumers have found a suitable substitute. Substitution happens all the time as a result of economic decisions that are made by consumers. For example, if someone needs a winter coat and likes one with a designer name and a price that reflects that name, the purchase may not be made. Instead, the person finds a similar coat that does not have a designer label and purchases it instead at a much lower cost.
Demand for goods or services determines the amount that will be supplied. The law of supply states that the greater the demand, the more that will be supplied; the lower the demand, the less that will be supplied. The amount that will be supplied by a producer of the good or service is based on capacity and willingness to supply the product at a specific price. A producer will not supply goods and services just because there is demand for them – price for the good or service is an important consideration.
If consumers are willing to pay more for a good or service, the producer will likely be willing to shift more resources in order to increase the supply of the demanded product. If a rancher is raising prime beef cattle and there is high demand for this good and consumers are willing to pay more for high-quality beef, then the rancher might be willing to supply more even if it is necessary to shift resources or acquire additional resources to be able to do so.
Demands change, supplies change, and prices change. So how does a producer know how much is enough and what price to charge for the goods and services? Very simply, the demand for and supply of goods and services can be plotted on graphs using different prices. The supply and demand for a good or service intersect on the graph at what is called the equilibrium price, or the price where all of what is supplied will be demanded. If the price is below equilibrium, there will be a shortage of the good or service, and if the price is above equilibrium, there will be a surplus of the good or service.
Dolan, Edwin G., and Lindsey, David E. (1991). Economics. Chicago: Dryden.
Heilbroner, Robert L., and Thurow, Lester C. (1987). Economics Explained. New York: Simon & Schuster.
Lipsey, Richard G., Steiner, Peter O., Purvis, Douglas D., and Courant, Paul N. (1990). Economics. New York: Harper & Row.
McEachern, William A. (1991). Economics: A Contemporary Introduction. Cincinnati, OH: South-Western Publishing.
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