Have you ever wondered who decides how much to pay for a pair of shoes? What do the numbers on the price tags truly indicate? How does one realise how many shoes to manufacture? The answer is the demand for and supply of a particular good.
Moreover, various characteristics influence demand and supply, which in turn is reflected in the price level and quantity demanded. The two variables have a unique relationship with price. While demand is inversely proportional to price, supply and price have a direct relation.
There are various laws in economics such as the Law of Demand, the Law of Diminishing Marginal Utility, the Law of Supply, and concepts like Demand Elasticity and Supply Elasticity that provide a detailed understanding of various factors influencing demand and supply. In macroeconomics, Aggregate Demand and Aggregate Supply are significant economic indicators of growth.
Why are these variables necessary?
The concept of Demand and Supply is integral to economics and the study of national and international economic activity. Foremost, it forms the basis of trade in our economy. The analysis of these variables helps calculate national growth rates (GDP) and global economic growth.
Demand and Supply- Its Advantages
- By setting a price, Demand and Supply facilitate the exchange of goods and services at a given point in time.
- The two variables also help understand the changes in price and quantity demanded as well as their causes.
- They are significant indicators of national and global economic growth. Aggregate demand is used to calculate the Gross Domestic Product (GDP) of a nation.
Economics is incomplete without studying Demand and Supply. They form the basis of all economic activity. Major decisions across the economic realm are based on these variables, and hence, they are also subjects of extensive research. Demand highlights the needs and wants of an individual and society, and supply reflects the capability to meet the demand. Therefore, demand and supply analysis remains significant in tracking the nation’s economic trajectory as well.