COMPLETE INFORMATION AND DIFFERENCE BETWEEN DEMAND AND SUPPLY
Demand:
Definition: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various price levels within a specific time period, ceteris paribus (all else being equal).
Supply:
Definition: Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various price levels within a specific time period, ceteris paribus.
Now, let’s present the differences between demand and supply in a table format:
| Aspect | Demand | Supply |
|---|---|---|
| Definition | The quantity consumers are willing and able to buy. | The quantity producers are willing and able to sell. |
| Represents | Consumer behavior and desires. | Producer behavior and production capacity. |
| Relationship with price | Inversely related (law of demand): As prices rise, demand falls; as prices fall, demand rises. | Directly related (law of supply): As prices rise, supply rises; as prices fall, supply falls. |
| Factors affecting | 1. Price of the product. | 1. Price of the product. |
| 2. Consumer income. | 2. Cost of production. | |
| 3. Price of related goods (substitutes and complements). | 3. Technology and production methods. | |
| 4. Tastes and preferences. | 4. Expectations of future prices and conditions. | |
| 5. Population and demographics. | 5. Government policies and regulations. | |
| Elasticity | Price elasticity of demand measures how sensitive demand is to price changes. If it’s elastic, small price changes lead to significant quantity changes. | Price elasticity of supply measures how sensitive supply is to price changes. If it’s elastic, small price changes lead to significant quantity changes. |
| Curve/graph representation | Downward-sloping demand curve on a graph. | Upward-sloping supply curve on a graph. |
| Objective | To maximize utility (satisfaction) given a budget constraint. | To maximize profit given production constraints. |
Key Points:
- Demand is about consumers, while supply is about producers.
- The law of demand states that as prices rise, demand falls, and vice versa. The law of supply states that as prices rise, supply rises, and vice versa.
- Both demand and supply are influenced by price, but they are also affected by various other factors.
- Elasticity measures the responsiveness of quantity to price changes; both demand and supply can be elastic or inelastic.
- On a graph, demand is represented by a downward-sloping curve, while supply is represented by an upward-sloping curve.
- The objective of demand is to maximize utility, while the objective of supply is to maximize profit.
