What do supply and demand curves represent? Show how they can be used to illustrate how markets clear. Using appropriate diagrams, show how changes in demand and supply lead to changes in price and output, giving examples from real life.

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Daniel Mensah

Alberto Cruz

What do supply and demand curves represent? Show how they can be used to illustrate how markets clear. Using appropriate diagrams, show how changes in demand and supply lead to changes in price and output, giving examples from real life.

Prices are used in a free-market economy as a key instrument to relay information from buyers to sellers and vice-versa. The use of demand and supply curves illustrate and explore this ‘price mechanism’ in greater detail.

        A demand curve, in essence, is a diagrammatic representation of its relationship with price. This relationship that demand has with price is known as the law of demand which states that as price for a product increases, the demand for it will decrease, meaning there is an inverse relationship between demand and price. In general then, diagrammatically, demand curves are downward sloping:

 

 

As a result, the amount of the product demanded will depend on the effect of substitute products and the size of the income of the consumer. Price is not, however, the only factor that can effect how much of a product consumers are prepared to buy. Determinants such as tastes, distribution of income and expectations of future price changes.

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        Similar to a demand curve, a supply curve is a diagrammatic representation of its relationship with price. A supply curve may be that of the market, or of the firm. The law of supply states that there is a direct relationship between price and quantity supplied, under competitive conditions.  The law of supply (and for demand) is made under the assumption of ‘ceteris paribus’, whereby all other variable factors other than the one being scrutinised remain constant. Market price, input prices, technology, expectations and the number of producers in that particular market determine the amount of a product that a ...

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