Demand
The demand is a very crucial concept in economics. The determination of price such goods, services and resources in a free market economy depends upon two oppositeforce "demand" and "supply". In order to highlight the problem of price determination we initially take into account the concept of demand as under:
Definition of Demand
Common demand means a mere "wish" or "desire" to have a commodity. But in economics, at least two conditions must be fulfilled for the existence of demand.(a) A strong "will" to purchase anything.
(b) Power to purchase a commodity.
According to Prof. Benham, " Demand is the quantity of a commodity which a Consumer are prepared to purchase at a certain price during a specific period
of time".
Law of Demand
Law of demand can be described in view of the functional relationship between
price and quantity demand. Our common observation is that; with the change in
the price of a commodity in the market it's quantity demand is inversely change
i.e higher price less demand while more demand due to decrease in price. This behaviour of the consumer is called "law of demand"
qd = f (p) "quantity demand is an inverse function of price".
 |
| Demand curve |
In this diagram p0 and p1 is the price while q0 and q1 is the quantity of a commodity. When price is p0 quantity of a commodity is q0. When price decreases to p1 quantity
demand increases to q1. We get our demand curve by joining two points. Demand curve is negatively sloped.
Definition of Supply
Supply of any good or service depends upon the behaviour of producers or sellers of that particular commodity or service.
Supply of a commodity can not be discussed without its price. Thus supply means
the quantity of a commodity offered for sale in the market at a specific price during
a given time period.
Law of supply
It is observed in the market that there is "direct and positive relationship " between
price and supply of a commodity. It means that supply and price move in the same
direction. Thus qs = f(p) "quantity supplied is a direct function of price"
Supply curve
In this diagram we take prices along y axis and quantity supply along y axis.
When price is 15 quantity supply is 10 when price increases quantity supply
also increases when price is on 30 quantity supply also increase by 10 to 30
We get supply curve by joining the two po A and B. Hence supply curve is positively sloped.
Equilibrium
Concept of equilibrium
Equilibrium is a situation which indicate balance between two opposite forces.
A point where two curves moving in opposite direction intersects each other is known as "equilibrium point" e.g Equilibrium of National Income where aggregate
Supply = aggregate demand or Y = C+I or S = I.
Market equilibrium where DD (demand curve) intersects Ss (supply curve) as DD
is negatively sloped and Ss is positively sloped.
Demand and Supply equilibrium or Market equilibrium
As qd = f (p) and it is a decreasing function thus demand curve is negatively sloped moving downwardly from left to right.
On the other hand qs = f (p) and it is an increasing function. Hence supply curve is positivelysloped moving upward from left to right. Point of intersection of the both curves "E" shows that qd = qs (equilibrium quantity) . The price at which quantity demand
= quantity supplied is known as "equilibrium price".
This is the situation known as "Market Equilibrium". under perfect competition
market price is determined at the point where qd = qs.
It is also explained with the help of diagram.
 |
| Market Equilibrium |