Commodity or service
The law of demand states that holding everything else constant, the quantity of a good or service demanded is an inverse function of price.
This then means that as the price of a commodity increases, fewer consumers would buy the products. By demand is meant actual amount of goods or services bought by the customer. Demand should not be confused with goods provided since not all goods are consumed. This demand law will untimely affect the producing firm. The firm would not fix a high price to the commodities they produce since they would loose to others offering cheap prices (Friedman, 2007).
The above demand curve indicates the movement of demand as relates to price. An increase in price causes decrease in demand and the movement is along the demand curve. Other goods may cause a shift the demand curve causing it to move either to the right or left. A shift to the right means that more goods are demanded and the prices are higher which would be profitable to the firm. On the other hand if the demand curve moves to the left it means that prices of commodities have gone down reducing profit margins. Two types of goods affect the demand curve causing it to shift.
Complements goods are good that are consumed together. Change of price in one good causes change in the other. If one good’s price increases, demand for the other good will decline forcing both goods prices to decrease. The demand curve shifts to the left. Substitute’s goods cause demand to rise for the other good. The demand curve thus moves to the right.
Another factor that affects the demand for goods and services is change in income levels. Two types of goods affect demand to income changes. Normal goods are consumed at greater quantities as income rises.An increase in income thus causes the demand curve to shift to the right.
Inferior goods are consumed at decreasing quantities with income increase. Therefore when income increases the demand curve shifts left. The management of the firm needs to understand how these market forces affects them. An increase in population shifts the demand curve to the right due to increased demand. An increase in preference also shifts the demand curve to the right since people are more willing to accept goods at every price. It would not be enough to evaluate the demand curve without looking at the law of supply.
The law of supply states that holding other factors constant, the quantity of a good or service supplied is usually a positive function of its price (Nisor, undated). The above figure illustrates the changes in supply with aspects to price. Supply in this case means the amount of goods produced to meet the demand. As the price of the commodity increases, the supply increases. This would be favorable to the firm since more goods would bring more sales for the firm.
For a change in the own price of a commodity, the movement is along the supply curve.The factors that cause the supply curve to shift are changes in technology and a change in the factors of production. An increase in the cost of production factor shifts the supply curve to the left. An increase in technology on the other hand shifts the curve to the right. This is because advancement in technology allows more output at any level of input used. An interaction of demand and supply determine the final price of the commodity or service.
The price that is finally settled upon is called the equilibrium price. The equilibrium price is defined as the price at which demand is equal to supply. The diagram below illustrates this.
Get access to
Guarantee No Hidden