One of the most fundamental concepts in Economy is
Supply and
Demand. Demand refers to how much (
quantity) of a product or service buyers desire. The quantity demanded is the amount of a product people are willing to buy at a certain price. The law of demand tells us that the higher the price, the lower the quantity demanded. In the other hand, supply refers to the quantity producers are willing to take to the
market, according to different prices. The law of supply tells us the higher the price, the higher the quantity supplied.
In this case we are only going to focus on supply. Price is not the unique factor that determines the supply and demand of a product. There are many other factors that determine the position of supply and demand. In the case of supply, there are factors that will move the curve to the left (decrease) or to the right (
increase). The factors that will produce that effect are:
· Cost of inputs: If the costs of production increase, supply
decreases. So, the curve moves to the left side. For example, an increase in the wages of teachers can produce a decrease in the number of sections that is offered each semester.
· State of technology: The technologic advances let the production of good and services at lower costs. In this case the curve of supply move to right side.
· Number of sellers: For example, an increase in the quantity of sellers in the
banana’s market probably will increase the supply of bananas, therefore, the curve moves to the right.
· Taxes, and subsidies: For example, in the case of subsidies: an increase by the Mexican Government to the UNAM will increase the supply of educational services in that institution.
It is also important to mention that there are occasions in which quantity demand is greater than quantity supplied. We called this: shortage. For example: Supposed a hurricane attacks the Dominican Republic, and it destroys the banana crops. In the diet of Dominicans, banana is an essential product, so even the hurricane, the demand of banana stays at the same level. Nevertheless, the supply of banana decreases. This situation causes and scarcity of banana because quantity demanded of banana exceed the quantity of banana supply. Therefore, the price of banana increases. The hurricane decreases the quantity of banana available, so the supply decreases also. What happened? Because of the demand stayed equal, as it used to be, it surges the scarcity of the product. The price of banana increased in the market.
There also occasions that occurred in the other way, quantity supplied is greater that quantity demanded. We call this surplus. For example: Supposed there is a surplus in the ice-cream market, sellers of ice cream find their freezers increasingly full of ice cream they would like to sell but cannot. They respond to the surplus by cutting their prices. Prices continue to fall until the market reaches the equilibrium.
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