Introduction
Basic concepts
Through the
concepts of demand and supply modern economics explains how scarce resources
are used to produce goods and services. As there are two main participants in
the economy – consumers and producers – the former`s behavior is captured by the
demand and latter`s by the supply. Being more specific, demand for a specific
commodity shows how much consumers want that particular commodity at different
prices. Supply of a specific commodity shows how much producers are willing to
provide that particular commodity at different prices. In other words, demand
(supply) reflects the relationships between price and quantity demanded
(supplied).
Defining
demand and supply through price just refers to the fact that market economy
operates through price system. In other words, price is one of the most
important factors affecting consumers` and producers` economic behavior and
related choices. Obviously there are many other factors besides the price that affect consumers` (e.g. income) and producers` (e.g. prices of resources) behavior. Therefore it is worth to notice that since demand (supply) itself is defined through price, it is said that price affects quantity demanded (supplied) and all other factors affects demand (supply).
Law of demand is more specific as it determines the shape of the relationship by stating: the relationship between price and quantity demanded is negative. As concerns the supply, it is based on the idea that the relationship between price and quantity supplied is positive.