What do you mean by Prices, Cost, Demand, and Supply?
In this blog, we are trying to explain Demand and Supply, how it affects the cost and how the Prices are controlled throughout the entire process. We also tried to explain demand and supply through a simple mathematical graph.
We know from our last blog that allocation and distribution of scarce resources is one primary function of prices. Prices are helpful when one use of scarce resources is required.
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Also, when both uses are required. For example, milk is used to make cheese, ice cream, and yogurt, and all of them are needed by the consumers. Prices play an essential role in maintaining equilibrium in such cases. When a consumer buys any of the products from the three, he/she indirectly bid for the milk. If the demand for cheese increases, then the prices will rise, which will make the producers of cheese bid for more milk from the revenue. This increases the demand for milk and raises the price of the milk.
So the ice cream and yogurt producers will have to make the higher bid for milk for their use. The cost of ice cream and yogurt will rise. If ice cream customers are ready to buy ice creams at higher prices and yogurt customers are not prepared to buy them for higher prices, the increased demand for cheese is fulfilled from the share of yogurt milk. This is how resources find their most value able use. Now let s extend our knowledge to supply and demand.
Demand and supply
We know for sure that as a consumer, we want more at less price and less at higher prices. As a producer, we want to sell more at higher prices and less at lower prices. We need to understand that both sides are greedy(greed, scarcity is explained in the 1st blog). The blame mostly goes on the producers that they are greedy when they price a product at a higher price, but that is not the case.
Let’s say that a major employer of city A has gone bankrupt. All the employees of his are shifting to a new place searching for new jobs, leaving their houses for sale. As there is competition between sellers, the houses’ prices will fall in a short period. No matter how high in price, the sellers want to sell their product. In this case, the house will not fetch a high price because of competition as the supply of houses has increased suddenly. The demand for houses has not increased proportionately.
Similarly, if there is a city B that is developing at an excellent rate because of which a large number of jobs are present at that place. People will tend to, in fact, will shift to such places resulting in the demand for houses. Now the housebuilders at place B will price the houses higher as the demand is strong and the supply is weak. This shows that it’s the circumstances that regulate the prices and not peoples’ greed. Basically, prices are middle grounds, the aggregate value of supply and demand.
Essential Mathematical representation of supply and demand
But what if the customers at place A ask even lower price than the seller can afford? Then the seller will deny selling his house, but at that price, even more, customers will be willing to buy houses. In the same way, if the housebuilders at place B ask for even more prices for houses, fewer customers will be willing to purchase the houses. This again shows that it’s the circumstances that regulate the prices and not peoples’ greed. Let’s understand this with a simple graph.
Y-axis shows the prices of the product, and the x-axis represents the quantity of the product. The red line is the demand line, and the blue is the supply line. As the quantity of a product increases, the demand decreases; hence the demand line is downwards.
As the quantity of a product increases, the supply of a product rises; thus, the supply line is upwards, as shown in the graph. As we have seen from the example of houses, we know that if the supply is more than that of city A, the sellers have to face problems and competition.
In the same way, if the demand is more than the which is in the case of city B, the buyers have to face the problem or competition. To make the situation even for all the people, we need to make the quantity corresponding to the equilibrium point and set the prices corresponding to equilibrium prices. We can see from the graph that an equilibrium point is the meeting point of the supply and demand line.
What is the cost?
Everything comes at a cost. This line is influential, and many people use it extensively, but hardly a few understand what it actually means. For many, cost means the money they need to give up for a particular thing. But, In economics and the real world, the cost of one specific thing is the alternate use of the scarce resources used to make that particular thing. But then you will say that not everything comes at a cost. Like now, you are reading this blog for free. But the thing you need to understand here is you need time to read this blog, but you could have used this time to listen to music or anything else.
So the cost you are paying here is music or anything else you could have done, i.e., alternate use of your time. You spent that cost of listening to music because you feel you are getting something meaningful, i.e., knowledge from this blog. For some people listening to music would have been more important. But you get my point. Similarly, we know many countries use resources, capital, labor, and time to make weapons.
Still, the same can be used to feed millions of hungry and malnourished people. So the weapons, security come at the cost of hungry people. So remember, alternate use of resources is the cost you pay for anything.
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Image Credits: File:Supply-demand-equilibrium.svg – Wikipedia
