Sunday, October 18, 2009

I am not an economist, but I am aware of this common sense principle: the law of supply and demand.
It does not only define those two but emphasizes their relationship to "price" as well.

"As demand increases the price goes up which attracts new suppliers who increase the supply bringing the price back to normal."

Therefore achieving the state of Equilibrium.

Image Courtesy of Wikipedia

The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). 2, along with a consequent increase in price (P) and quantity sold (Q) of the product.

I just felt like reviewing these theories not for the sake of getting involved with the ongoing debate @ Neutral Grounds Forum but to have an stronger grasp on how it affects the movement of stocks in the volatile market.

The Law of Supply

- states that at higher prices, producers are willing to offer more products for sale than at lower prices

- states that the supply increases as prices increase and decreases as prices decrease

- states that those already in business will try to increase productions as a way of increasing profits


The Law of Demand

- states that people will buy more of a product at a lower price than at a higher price, if nothing changes

- states that at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price

- states that at lower prices, people tend to buy some goods as a substitute for others more expensive

Oh, economics!


Mom said...

It is all a very fragile balancing act that is intertwined in a confusing web of connection.

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