People need and want {demand}| physical objects {good, economics}, to consume or use, and actions {service, economics}, to have something done for them. To acquire goods and services, people have to exchange something. People like to have money itself. Money provides security, prestige, and ability to make future purchases. People exchange their work/time for money. People value time for vacation and leisure. They must choose between work and free time.
For goods and services {supply}, limiting production {production quota, supply} or allotting fixed amounts to people {rationing, supply} makes cost and price rise.
Demand and supply change with price {elasticity, economics}|.
demand
Demand can change greatly with price, if substitute product is available, if product is not necessary, or if consuming that product is not a habit. Demand can change little with price, if no substitute product is available, if product is necessary, or if consuming the product is a habit.
elasticity
Percentage change in quantity demanded divided by percentage change in price {price elasticity} can be greater than one {elastic demand} or less than one {inelastic demand}.
revenue
Total revenue is price times quantity. Total revenue is greatest if elasticity equals one. Because costs minimize at maximum quantity, and price maximizes at minimum quantity, highest revenue has equal price and quantity change.
income
Percentage income change affects product quantity demanded {income elasticity}.
substitution
Related-product price changes {substitute product} {complementary product} affect demand for product {cross-elasticity}.
factors
Production-factor demand {derived demand} depends on demand elasticity, substitute availability, and percentage of total cost.
supply
Supply elasticity changes with new production methods, varying production-factor prices and quantities, and production expansion or contraction difficulty.
Goods and services cost money {price}.
demand and supply
In free markets, demand and supply determine price, and price determines supply and demand, by a sort of invisible hand.
High price makes low demand, and low price makes high demand. On graphs, demand curve has negative slope. See Figure 1.
High price makes high supply, and low price makes low supply. On graphs, supply curve has positive slope.
demand and supply: value
Relative good or service {resource, supply} price measures supply and demand. People choose money, time, goods, or services to maximize their or their family's satisfaction, following their self-interest. Choices involve money, time, good, or service exchanges, so people must weigh costs and benefits. People can consider other alternatives, such as making no choice. People and situations have different good, service, time, and money optimum choices. Ideally, people can exchange until whole group has optimized member satisfaction.
Perceived demand for goods and services stimulates their production, because they can sell. People change jobs to work at places with more profit and higher pay. Production creates good and service supplies. Thus, businesses supply more-valuable goods and services more. Ideally, trend always increases total satisfaction.
price
Price is where supply amount equals demand amount {price equilibrium}.
Increasing good or service price causes people not to choose that thing and perhaps choose another similar thing. This lowers good or service demand and makes price fall. See Figure 1. Price returns to where it was before.
Decreasing good or service price increases demand and makes price rise. See Figure 1. Price returns to where it was before.
price: equilibrium
Demand and supply are equal at only one point, at moderate price, demand, and supply. At this point, supply equals demand. This point sets actual price {equilibrium price} and quantity sold {equilibrium quantity} in market.
price: demand
Price increases with demand. If quantity demanded is high, value is high. If quantity demanded is low, value is low.
Increased good or service demand, caused by advertising, innovation, cultural changes, or perceptions, not by price change, shifts demand curve to right. It makes demand higher at same price. It makes demand the same at higher price. See Figure 2.
Decreased good or service demand, caused by counteradvertising, other-product innovation, cultural changes, or perceptions, not by price change, shifts demand curve to left. It makes demand lower at same price. It makes demand the same at lower price. See Figure 2.
price: supply
Price decreases with supply. If quantity supplied is low, price is high, because fixed costs spread over fewer items. If quantity supplied is high, price is low, because fixed costs spread over many items.
Decreasing good or service supply, by decreased production, transportation problems, natural disaster, or war, shifts supply curve to left. It makes supply lower at same cost. It makes supply the same at higher cost. See Figure 3.
Increasing good or service supply, by increased production, increased efficiency, or increased transportation, shifts supply curve to right. Supply is higher at same cost. Supply is the same at lower cost. See Figure 3.
price: disturbances
In short term, demand curve does not change, and supply curve does not change. After price disturbance, price returns to former equilibrium value. After disturbance to price equilibrium, price and quantity converge back to equilibrium by successive stages of price change, then supply change, then price change, and so on {cobweb theorem}. See Figure 1.
For example, if small company goes bankrupt, supply decreases slightly. Price goes up slightly. Other suppliers want to make more. They make more, cost goes down per item, and price is lower. Price returns to equilibrium.
If small company enters market, supply increases slightly. Price goes down slightly. Other suppliers want to make less. They make less, cost goes up per item, and price is higher. Price returns to equilibrium.
If population increases slightly, demand increases slightly. Price goes up slightly. Suppliers want to make more. They make more, cost goes down per item, and price is lower. Price returns to equilibrium.
If population decreases slightly, demand decreases slightly. Price goes down slightly. Suppliers want to make less. They make less, cost goes up per item, and price is higher. Price returns to equilibrium.
price: government
Artificial demand can keep price too high.
Price supports can keep price too high. Businesses make more high-priced items, and some do not sell, because public does not have that demand.
Government or business can keep surplus in storage. Note: Goods on hand are not surplus, but just stock {stock, good} {in stock} for use by retail stores as inventory.
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Date Modified: 2022.0225