ABCs of Supply and Demand Curve and Multifarious Factors

Supply and Demand Curve

Economics is a fun subject only if you grasp macroeconomics and microeconomics concepts. And you can solve numerical or state reasons accurately by applying those concepts. In this blog, we will take a look at the supply curve, demand curve, check out associated terminologies, interpret them and analyze various factors.

Read on to get an insight.

What is Supply Curve?

From an economics perspective, the supply curve is a graph that shows the relationship between the cost of a commodity or service and the amount delivered over time. The price is represented on the left vertical axis of the graph, while the quantity delivered appears on the horizontal axis in a typical illustration. Know about equilibrium price.

As product price and the amount supplied are directly related, the supply curve is usually depicted as a slope rising from left to right. This relationship is predicated on the assumption that certain ceteris paribus (other things being equal) criteria are maintained.

What is the Relation between the Supply and Demand Curve?

To understand the topic mentioned above, you have to comprehend the essence of the Law of Supply and the Law of Demand. The Law of Demand refers to the quantity of product that buyers are willing to buy at various price points over a given period.

While demand is concerned with the consumer's desire to earn a profit, supply is concerned with the seller's desire to make a profit. As per the Law of Supply, a supply schedule illustrates how much product a supplier is willing to provide the market at particular price points over a set period.

Demand Curve

The quantity of an item required is determined by its price and a variety of other factors such as the prices of other commodities, consumer incomes and preferences, and seasonal impacts.

All elements except the price of the item are frequently held constant in basic economic analysis. The study then entails assessing the link between different price levels and the highest quantity that consumers might purchase at each of those prices. You should know about money market.

The price-quantity combinations can be plotted on a demand curve, with the vertical axis representing price and the horizontal axis representing quantity. A downward-sloping demand curve shows the propensity of consumers to acquire more of a commodity at lower prices.

The Relation

The price on the vertical axis and quantity on the horizontal axis of demand and supply curve graphs are the same. Thus, the demand and supply curves for a particular commodity or service might show on the same graph. 

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What is the Aggregate Supply Curve?

The entire supply of goods and services produced within an economy at a specific overall price in a particular time is known as aggregate supply. This is also known as total output. The aggregate supply curve depicts the link between price levels and the amount of production that firms are prepared to produce. A positive relationship exists between aggregate supply and price level in most cases.

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Which Determinant Might Increase Supply in The Market?

As far as the determinants concerned might increase the supply, you have to give this section a thorough read. The factors are mentioned below:

• Price

Price can be considered as the amount a customer is willing to pay for a product or service.  According to the law of supply, when the price of a commodity rises, so does its supply, and vice versa.

• Technology used in production

Shifts in the supply curve are frequently the result of technological advancements that lower production costs. Technology advancements can enhance manufacturing efficiency, thus lowering manufacturing costs. Read about disposable income.

• Number of sellers in the market

As the market supply is essentially the total of each seller's supply, the number of sellers entering the market has an influence on the market supply. More sellers entering the market increases supplies while exiting sellers reduces supply.

• Cost of production

The availability of a commodity and the cost of manufacture are diametrically opposed. If the cost of production rises, corporations will reduce their product supply to conserve resources.

• Government policies

The government has a significant impact on product supply. The lower the tax, the more of that good is available. On the other hand, if stringent controls are established, and excise duty is applied, the supply of the commodity will decrease.

• Transportation condition

The supply chain relies on asset and logistics management to move raw materials, parts, and completed goods from one location to another. Transport is always a stumbling block to product supply, as products are not delivered on time due to inadequate transportation facilities.

• Prices of other goods

The production of any one product will be influenced by the prices of other goods. When a company's equipment and labor allow it to make multiple types of items, it tends to generate more high-profit products.

Hopefully, now you know about the determinants.

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Why is the Supply Curve Referred to as a Marginal Cost Curve?

A business's marginal cost is the additional cost of producing one more unit of a product. It's calculated by dividing the overall cost change by the entire production change. The supply curve depicts the various prices at which companies are willing to sell their goods. A company is more likely to offer more products if it is promised a larger return on investment.

For example, if the price earned from selling wheat is high, a farmer will opt to plant additional wheat. However, the farmer's readiness to sell more wheat is contingent on the higher costs of planting that wheat, such as land lease, fertilizer charges, or the increased labor required. As a result, the supply will be determined by the additional cost of producing these extra units. This is known as the marginal cost.

What is the Effect of an Increase in the Price Level on the Short-Run Aggregate Supply Curve?

The relationship between the price level and the economy's production is known as aggregate supply. The aggregate supply is graphed as an upward sloping curve in the short run. The short-run aggregate supply is calculated using the equation Y = Y* + α (P-Pe). The coefficient α is always greater than 0, Y is the economy's production, Y* is the economy's natural level of output, P is the price level, and Pe is the expected price level from consumers.

Since the quantity supplied grows as the price rises, the short-run aggregate supply curve is upward sloping. Firms have one fixed factor of production in the short-run (usually capital). At a given price, the output and real GDP increase as the curve shifts outward. Hence, the price level and output have a positive relationship, as evidenced by the short-run aggregate supply curve.

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