Economists often use the supply and demand of goods and services to explain market prices. Supply and demand curves are graphs used to show the relationship of the supply and demand of a product. The model produced by graphing the supply and demand curves is one of the fundamental concepts within economics. The market price, commonly called the price equilibrium, of goods is where the supply and demand curves intersect.
Supply represents that amount of goods or services an organization is willing to supply at a given price. When the prices of goods and services rise, then the supply of goods and services increase. When the prices of goods and services decline, then the supply of goods and services decrease. The supply curve is a graphical depiction of the supply of goods and services for an organization or country. On the supply curve, the quantity of goods and services produced are plotted on the X axis and the prices of goods and services are plotted on the Y axis.
The changes in the price of goods and services cause movement along the supply curve, but other factors cause the supply curve to shift to the left or the right. When supply decreases, the curve shifts to the left. When supply increases, the curve shifts to the right. Factors that may cause the supply curve to shift to the left include an increase in production costs, a heightening of government regulation, a bear market and a decrease in the number of competitors in the market. Factors that may cause the supply curve to shift to the right include a decrease in the cost of producing goods and services, a decrease in government regulation concerning the industry, a bull market, an increase in new technology and an increase in new competitors entering the market place.
Demand represents the correlation between the price of goods and services and the amount consumers are willing to purchase at a given price and time period. The demand curve is a graphical representation of consumers' demand of products. As the price of a product falls, the demand for that product increases. As the product of a product increases, the demand for that product decreases. The amount of demand for a product is plotted on the X axis and the price of a product is plotted on the Y axis. The law of diminishing utility causes the demand curve to slope downward from left to right, which means that the demand of a product automatically decreases when a product is purchased or consumed.
The changes in the price of a product result in movement along the demand curve, not a shift. Factors that determine shifts in the demand curve include the change in price of substitute goods, the change in price of complement goods, a change in consumers’ income and a change in consumers’ preferences. A shift to the left represents a decrease in demand and a shift to the right represents an increase in demand. If the price of a substitute good falls, the demand curve will shift to the left. If the price of complement good falls, the demand curve will shift to the right. An increase in consumers’ income will cause the demand curve to shift to the right. If consumers’ preferences change and they are no longer interested in the product, the demand curve will shift to the left.