SUPPLY AND DEMAND IN ECONOMICS
Supply and demand are the backbone of a market economy. Before switching to more complex aspects, you should get an insight into these fundamental concepts of economics.
Supply refers to the total amount of a product or service available to consumers. It describes the relationship between the price and available supply of a specific item, from the suppliers’ perspective. When prices of a product rise, producers are willing to manufacture more products in order to generate more profits. But when prices drop, producers may not be able to cover input costs selling the final product. For instance, the input costs for making a laptop are $150 plus labor costs, thus production will not be highly profitable if sold below the $150 input cost.
Conversely, when prices are higher, producers will be encouraged to produce more goods or services to get more profits. Keeping all the variables the same but escalating the selling price, producers will gain more benefit and incentive to make more laptops. The pursuit of greater profits will push the supply curve upwards.
Setting the price of a product or service lies on the market, not the producers. Suppliers only need to decide on the amount of goods to be produced depending on the market price.
Demand pertains to a consumer’s willingness and desire to pay a price for a given good or service. It represents the relationship between the price of a product and demand for it, from the consumer’s viewpoint. The demand for a certain product climbs proportionately to price increases, and vice versa.
For example, if a smartphones maker decides to sell its product at a lower price, a huge number of consumers will purchase it at a high frequency. Most will even buy more phones than what they actually need. On the other hand, if a smartphone will be sold at higher price, only wealthy people will be able to buy this product; hence the demand for it will be low.
While consumers are on the lookout for the cheapest product, manufacturers increase outputs when goods are sold at higher costs. Producers aim to sell their products at the highest price possible, while customers seek to pay as little as possible. The balance must be reached for the benefit of both consumers and producers. This is where equilibrium comes in, which is achieved when the supply and demand lines intersect. Moving away from this point will lead to an overall loss to the economy.
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