SUPPLY AND DEMAND

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Very unfortunately, this world we live in is plagued with scarcity. Everything is limited-- trees, water, gold, land, air (yes, air). Case and point, have you ever been denied of the opportunity to buy something because they are “out of stock”? Although it might seem that the number of goods in the world is infinite, it is not. It just seems infinite because we can’t have and can’t afford it all. Given a point in time, supply is always finite and countable.

Let me tell you all about SUPPLY and DEMAND.

Definition of terms: (from stock knowledge. HAHA!)

1. SUPPLY – this is the amount of goods (or services) that a seller is able to produce and willing to sell

2. DEMAND –this is the amount of goods (or services) that a buyer can afford and will be willing to buy

3. GOODS and SERVICES –the things you buy or sell

So how do people decide the number of goods to put in the market? This is where the law of SUPPLY AND DEMAND comes in. Assuming that because you are psychic, you know that 10 people will buy a glass of lemonade tomorrow. How many glasses of lemonade will you prepare for sale to maximize your profits? (Assume a fixed profit margin for all choices)

a) 0. Knowing that people would like to buy my lemonade, I am fulfilled and no longer need to prove my lemonade-making skills. I decide not to sell any.

b) 5. Knowing that 10 people will buy my lemonade, I will only make 5 glasses to make my lemonade exclusive

c) 10. Knowing that 10 people will buy my lemonade, I will make 10 to satisfy everyone.

d) 15. Knowing that 10 people will buy my lemonade, I will make 15 so that the 10^th buyer will think that there are still some people who will buy from me.

To maximize your profits, you will choose option C. Option A produces no profits (maybe even negative, if you have fixed costs), option B will not maximize your profits because you have an opportunity to sell that’s lost, and option D will give you additional expenses (spoiled unsold goods).

The law of supply and demand is as simple as striking a compromise. The quantity that will be produced should be at point where the supply curve meets the demand curve. Also called the point of equilibrium, at this level everyone will be happy. In simple language, the sellers will supply what the buyers demand at that given price. Here, there will be enough for everyone, no more, no less.

OTHER DEFINITION OF TERMS (based on stock knowledge)

1. OVERSUPPLY –when the sellers supply more than what the buyers can/will buy (given the illustration above, option D)

2. SHORTAGE –when the sellers supply less than what the buyers can/will buy (given the illustration above, option A and B)

Alexis Ventura
063702
ECO111 E