Supply and Demand

Definition

Supply and demand is a fundamental economic concept that describes the relationship between the quantity of goods available in a market (supply) and the desire of consumers to purchase those goods (demand). This relationship determines the price of goods and services in a market economy, influencing production, consumption, and overall economic equilibrium.

5 Must Know Facts For Your Next Test

1. When supply increases while demand remains constant, prices typically decrease as there are more goods available than consumers want to buy.
2. Conversely, if demand increases while supply stays constant, prices usually rise as consumers compete for the limited goods available.
3. Export subsidies can alter supply by making domestic goods cheaper for foreign buyers, potentially increasing demand abroad while affecting local prices.
4. Quotas limit the quantity of goods that can be imported or exported, impacting supply and thus influencing market prices and availability of products.
5. Understanding supply and demand dynamics helps policymakers make informed decisions about trade regulations and economic interventions.

Review Questions

• How does an increase in export subsidies affect the supply curve for a product in a domestic market?
  • An increase in export subsidies effectively lowers the cost for producers to sell their goods abroad. This encourages them to increase production to meet higher foreign demand, shifting the supply curve to the right. As a result, the increased supply can lead to lower prices domestically, assuming demand remains constant. Producers benefit from selling at both domestic and international markets, which can also stimulate overall economic growth.
• Discuss how quotas can create disparities between supply and demand in international trade.
  • Quotas limit the amount of a product that can be imported or exported within a certain timeframe, directly affecting supply in the market. When quotas are imposed on imports, domestic producers may face less competition, potentially increasing their supply but leading to higher prices for consumers due to reduced availability. Conversely, if export quotas are applied, domestic producers might find their output restricted despite high demand internationally, causing potential losses in revenue and altering production strategies.
• Evaluate the long-term implications of maintaining high export subsidies on domestic supply and demand dynamics.
  • High export subsidies can distort both supply and demand dynamics over time by encouraging overproduction in specific industries. While initially beneficial for exports, such subsidies can lead to inefficiencies as resources are allocated away from potentially more productive sectors. In the long run, this could cause domestic prices to become artificially low, making it difficult for unsubsidized industries to compete. Additionally, as foreign markets react to these subsidies with their own trade measures, domestic producers may face retaliatory tariffs that destabilize their operations.

Related terms

Market Equilibrium:

The point at which the quantity supplied equals the quantity demanded, resulting in a stable market price.

Elasticity: A measure of how much the quantity demanded or supplied responds to changes in price, indicating whether demand or supply is sensitive or insensitive to price changes.

Price Controls: Government-imposed limits on how high or low a price can be charged for a product, which can lead to shortages or surpluses in the market.