What is a demand curve for business

supply and demand

Are you wondering what supply and demand are all about? The most important model of economics and business administration is simply explained here. The relationships are also illustrated by the appropriate price-quantity diagrams.

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Supply and demand simply explained

Meet at a market offer and demand on each other. You can think of any kind of market: the fish market, the flea market, the supermarket or even the stock market. All of these markets have one thing in common:

  • There are Seller, i.e. providers of goods and services.
  • There are Buyers. These are all those who want to buy a product, i.e. buyers.

These two parties negotiate in the market to find a price that both parties are happy with. Basically applies to the negotiations: The lower the price, the more buyers want the good. Conversely, the higher the price, the more sellers want to sell the product.

Supply and demand in market equilibrium

If you now meet in the middle at a price, there are as many buyers as there are sellers. This equilibrium corresponds to the simple one principleofModel: Goods and services are only offered if there are buyers who are actually willing to buy them.

The supply corresponds to the demand and there is a so-called Market equilibrium. The price in market equilibrium, at which everyone is satisfied, is called Equilibrium price. In a real market, of course, there are many buyers and sellers. The sum of the demanded amount is then the Market demand and the sum of the amount offered is that Market supply. The large number of parties creates in one free market economy the competition.

offer

The supply corresponds to the amount of goods offered by sellers in the market. These can be raw materials, products or services. The providers exchange these goods for one Producer surplus to realize. They either exchange the goods for money or directly for other goods.

Imagine you're in a fish market. There are only two stalls selling 4 fish each. The market offer is then eight. The amount offered depends on the price of the goods. The higher the price, the larger the amount offered. If the price of fish goes up, more sellers will come into the market because the business is better. This would increase the market supply. The Offer function represent.

demand

Demand is the customer's intention to buy a good or service at a certain price. In daily life you need things. You have a need like a hunger for fish. To satisfy this need, you go to the market and look for the seller of the relevant product. The value you realize by buying is known as Consumer surplus.

Now back to the example. The sum of the quantities demanded corresponds to the market demand. You and your neighbor want to buy four fish each. The market demand is therefore eight. However, if the price went down, you would probably buy a few more fish. The lower the price, the higher the amount you ask for. The Demand function represent.

Market equilibrium

You can see that demand and supply in this model are only determined by price. A change in the price changes the quantity demanded and the quantity offered in the model. This means that you are sliding up or down on an existing supply or demand function. Attention: The actual change in demand or supply regardless of the price leads toShifting the curves self.

Imagine that you are given a price-quantity diagram.

The offered amount starts with a small quantity at a low price and grows as the price rises. If the price of fish is only one euro, the amount demanded is incredibly high because the fish is so cheap. The fish sellers will of course increase the amount offered and thus the price in order to earn more. Imagine that you are now going up the supply curve. With an increase in price, the demanded amount go back. That's why you then “slide” up the demand curve.

Equilibrium price and quantity

So there has to be a price at which the quantity demanded corresponds exactly to the quantity offered. This situation is known asMarket equilibrium, which in Intersection of the two curves. The price at which people buy and sell there is thatEquilibrium price. Now you know how that Pricing works in a free market economy.

If the fish market has eight fish but you and your neighbor only buy seven, the market is out of balance. The selling price was so high that you only wanted to buy seven fish. Now, if the sellers lower the price so that you can afford eight fish, the supply will match the demand again. This new price is the new equilibrium price in market equilibrium.

If you want to find out more about the equilibrium price, check out ours now Video to do this!