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.
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???