The Fundamentals of Supply & Demand in Economics
One of the most important elements of economic studies is the concept of supply and demand. Understanding how trade works, what causes prices to fluctuate, and the basic arithmetic of economics requires a firm grasp of supply and demand theories and the equations that sustain them. With a deep understanding of supply and demand, you will be better prepared to predict market swings or commodity price changes.
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Demand
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Demand is described as how much of a certain good or product people desire, and what cost they are willing to pay. For instance, when you go to dinner, you might demand one drink, and have already decided what an appropriate expense for the drink will be. Drinks that fall above your price range will out-price your level of demand and will not be purchased. This relationship can be expanded to globally traded commodities like oil and coffee.
Supply
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Supply refers to how much of a certain product is available to be purchased. Supply can also refer to the potential presence of a product, as is often the case with oil which has not been refined but can be counted on to be available in the near future. Supply is also contingent on the price at which sellers are willing to sell. If sellers cannot get the price they want, they may not make their materials available.
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Law of Supply and Demand
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The law of demand is a basic economic principle that governs the interaction between supply and demand. Simply put, the more expensive an item becomes, the less people will want to purchase it. Higher prices almost always result in lower demand. The law of supply provides a similar concept to economics, only opposite. The higher the price of a certain commodity, the more suppliers will attempt to sell it.
Elasticity
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When looking at supply and demand curves, it is important to consider the elasticity of the goods. While it is true that most goods fall subject to the laws of supply and demand, the amount by which they vary hinges heavily on how much consumers need the products. Some products have high elasticity because consumers will continue to buy them at very high prices, while other products have low elasticity because they are less of a requirement for life. Gasoline, for instance, has high elasticity as the demand usually stays steady through increases in price.
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