The theory of supply and demand Essay Example | Topics and Well Written Essays - 750 words

The theory of supply and demand - Essay Example The theory of supply and demand Supply and demand are two of the most critical concepts in the study of economics, especially in microeconomics where it determines market prices. The law of supply and demand concludes that in the event of an increase in demand while supply stays unchanged, then a shortage will ensue resulting in a higher equilibrium price. On the other hand, the law argues that if demand decreases while supply stays unchanged, a surplus will occur, causing the equilibrium price to fall. However, if demand stays unchanged and supply increases, a surplus will ensue, causing a lower equilibrium price. The last law of supply and demand concludes that if demand remains the same and supply reduces, a shortage will be experienced within the market, resulting in a greater equilibrium price. The earliest records of considerations of the concepts of supply and demand started in the 14th century. 14th century Muslim, Mamluk scholar, Ibn Taymiyyah suggested that if the need for goods within the market increase s while its availability reduces the price of the goods will increase. He also suggested that if the availability of the commodity increases and the need for it diminishes, its prices will come down. . In 1691, John Locke’s work â€Å"Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money† consists of an early and succinct description of supply and demand, as well as their inherent relationship.... cs subsequently used the term in his 1776 book in which he presumed that the supply price was inflexible, but its value would eventually diminish as its scarcity increased (Krugman and Wells 89). In effect, Smith was speaking to the law of demand. In his work, Principles of Political Economy and Taxation, Ricardo rigorously laid down the notion of the assumptions, which were utilized in order to develop his ideas of supply and demand. In the 19th century, the marginalist school of thought was established, and its key idea was that prices are determined by the most expensive price or the price at the margin. This was a massive change from Smith’s thoughts concerning the determination of supply price through the forces of demand and supply. The model of supply and demand encompasses the supply and demand schedules. A supply schedule is a table, which quantifies the relationship between the price of a product and the quantity supplied. A supply curve shows the link between the pr ice of the product and quantity supplied. Through the assumption of perfect competition, marginal costs determine supply. This means that firms will produce additional products when the production cost of an extra output is less than the price expected. Inherently, supply is determined by production costs, the number of suppliers within the market and the firm’s expectations regarding future prices (Krugman and Wells 247). On the other hand, a demand curve is the graphical depiction of a demand agenda and represents the quantity of goods buyers are both capable and willing to buy at certain prices. The law of demand requires that the demand curve must always be represented as downward-sloping, which means that consumers will by extra goods as prices diminish. Demand curves are also determined