Demand and Supply

Demand and Supply

Economics is a branch of goods concerned with the production, distribution, and consumption of goods and services. One of the fundamental components of this process is the concepts of demand and supply. Demand refers to consumers’ willingness to purchase a specific good or service at a given price, while supply indicates producers’ intention to offer the same good or service in the market. Demand and supply play a central role in the functioning of the economy. In this article, we will examine the fundamental concepts of the laws of demand and supply, their elasticities, and market equilibrium.

Demand

Demand denotes the quantity of a good or service that consumers are willing to purchase during a specific period at a given price level. According to economic theory, there is an inverse relationship between demand and price. That is, as the price of a product increases, its demand typically decreases. Complete Conversely, as the price decreases, demand increases. This relationship is known as the law of demand. According to the law of demand, there is an inverse relationship between price and quantity demanded: when the price of a good rises, demand for it falls; when the price falls, demand rises. This situation can be explained by consumers’ budget constraints and the availability of substitute goods. For example, if the price of a smartphone drops from 1000 TL to 800 TL, more people may be willing to buy it, increasing demand. However, if the price rises to 1200 TL, consumers become less willing to purchase it, and demand decreases.

Demand Elasticity

Demand elasticity is a concept that measures the responsiveness of quantity demanded to changes in price. In other words, it indicates how sensitive demand is to price fluctuations. Demand elasticity can be categorized into three main types: elastic demand, inelastic demand, and unitary elastic demand.

If a change in price leads to a proportionally larger change in quantity demanded, demand is considered elastic. Demand for luxury goods and substitute products is typically elastic. For instance, if the price of a smartphone increases by 10%, demand might decrease by 20%. If changes in price have little effect on quantity demanded, demand is inelastic. Necessities, water and medicinal like products generally exhibit inelastic demand: even if prices rise, consumers’ demand for these goods remains relatively unchanged. Unitary elastic demand occurs when the percentage change in price is exactly matched by the percentage change in quantity demanded. For example, if the price of a product increases by 10%, the quantity demanded decreases by 10%.

Supply

Supply refers to the quantity of goods and services that producers plan to offer in the market during a specific period at a given price level. There is a direct relationship between supply and price. As prices rise, producers become more willing to increase production and offer more goods to the market; as prices fall, production decreases. This relationship is known as the law of supply. According to the law of supply, there is a direct relationship between price and supply: when the price of a good increases, producers are motivated to produce more of it; when the price decreases, they reduce supply. For example, if the price of wheat rises from 2 TL to 3 TL per kilogram, farmers may decide to plant more wheat, increasing supply. However, if prices fall to 1 TL, farmers will produce less wheat, reducing supply.

Supply Elasticity

Supply elasticity measures the responsiveness of supply to changes in price. It indicates how much supply changes in response to price fluctuations. Supply elasticity can be classified into three main categories: elastic supply, inelastic supply, and unitary elastic supply.

If changes in price lead to significant changes in supply, supply is considered elastic. This is common in sectors where production can be easily increased. For example, in the technology sector, production capacity for new devices can be expanded rapidly. If price changes have little effect on supply, supply is inelastic. This typically occurs with products that have limited production capacity. For instance, in agriculture, supply may be inelastic due to long production cycles and capacity constraints. Unitary elastic supply occurs when the percentage change in price is exactly matched by the percentage change in quantity supplied. For example, if the price of a product increases by 10%, supply also increases by 10%.

Market Equilibrium

Market equilibrium occurs when demand equals supply. At equilibrium, a balance is achieved between consumers and producers in terms of price and quantity. The equilibrium point is where the demand curve intersects the supply curve. At this point, the quantity demanded is equal to the quantity supplied.

Example Scenario: In a city’s apple market, if the price of apples is 5 TL per kilogram and consumers demand 1000 kg at this price, while producers also supply 1000 kg at the same price, the market is in equilibrium. However, if the price rises to 7 TL, demand will decrease while supply increases. In this case, the market will attempt to return to the equilibrium point.