Role of Demand and Supply

ELEMENTS OF DEMASND AND SUPPLY
Elements of Demand and SupplyEvery economy must somehow the three basic economic problems: what should be produced, how goods and services should be produced, and for whom are the goods and services produced. Hence, every economy must make decisions, and mostly it relies on the market system and price. The operation of demand and supply is the answer to the three basic is the answer to the three basic economic problems. In a market economy, prices of goods and services are determined by the interaction of demand and supply.DemandIt refers to the number or amount of goods and services desired by the consumers. The quantity demanded is the amount of goods or services consumers are willing and able to buy/ purchase at a given price, place, and at a given period of time.Determinants of Demand1.       Price of the good itself. As the price of certain goods and services increases, the demand for these goods and services decreases or vice-versa.2.       Consumer’s Income. Consumer tends to buy more goods when their income increases, and vice-versa. The direction in which the demand will shift in response to a change in income depends on the type of goods, to wit:a.       Normal good refers to a good for which quantity demand at every price increases when income rises.b.      Inferior Goods refers to a good for which quantity demand falls when income rises.3.       Consumers’ Expectation of Future Prices. When someone expects higher prices especially for basic commodities, the tendency is buy more of these goods today. In the same manner, demand for such goods decreases if consumers expect prices to decline in the future.4.       Prices of Related Commodities/Gods. The quantity demanded of any particular good will be affected by changes in the prices of the related goods.a.       Substitute goods are good that can be used in place of other goods. They are related in such a way than an increase in the price of one good will cause an increase...