Journey in learning Economics

The law of supply and demand.

 

Economics can not be understood by

merely reading articles and wikipedia. To understand eco, and even more

to analyse eco, certain understanding of basic concepts is needed. Once

the basic concepts are understood, it becomes easier to grasp the reason

behind more tougher ones.

 

One such fundamental concept is the concept of supply and demand.

Q. Why is raising prices in aviation industry is not feasible?

A. Because the demand is very elastic which leads to substitution as soon as the price is raised.

Q. Though inflation is rising price control over the items would not be a good idea? Discuss why?

A. Price control works against the basic principles of supply and demand

 

Law of supply and demand is simple, its manifestations though are highly complex.

Supply

increases with the price and demand decreases with it. Here by supply

and demand we mean quantity supplied and quantity demanded. The quantity

demanded increases with price because more people are willing to buy a

particular item if it is available at low price.

Whereas if the

price is high, more people are willing to sell it so as to earn more

profits. Price is not what its understood in common parlance. Price is

simply a relation between the quantity available and the number of

people willing to buy it. Price is merely a value in exchange. Price

does not signify any intrinsic worth or metaphysical value of and item,

rather it only shows the money people are willing to pay for an object.

Economists for one do not know the value of anything but only price of

everything. High or low prices simply indicate toward market conditions

and they have no connotations whatsoever about the importance and worth

of a thing. Saying that price of something is too low or too high is

useless per se because it does not tell any thing but merely individual

preference of a person.

 

Having said this, I must add, that

quantity supplied is different from supply and quantity demanded is

different from demand. While quantity demanded will increase with

decrease in price, the same can not be said of demand itself. Demand is

rather a relation. Demand of a product will be  said to increase when

quantity demanded of a product increases at every price. Let us imagine

when overall income of a society increases or when the population

increases, overall quantity demanded of the commodity at any price would

increase. This is what we understand by demand pull. Since overall

demand increases by such phenomenon, the equilibrium price permanently

attains a higher value. Similarly, though quantity supplied would

increase with increase in price the same can not be said of supply

itself. Like demand , supply is a relation. Supply is said to increase

when the quantity supplied increases at every price. This may happen

because of some innovation, that is cheaper technology, or better

environmental conditions. The point at which supply and demand curve

meet is called equilibrium point. Price at this point is equilibrium

price. Greatest advantage is that equilibrium price is efficient in as

much as no good is being wasted at this price. Markets have a tendency

to reach to equilibrium price. Why???

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