THE THEORY OF DEMAND AND SUPPLY.
The interaction between the sellers of a particular thing and buyers of that particular thing is a theory. That theory is referred to as the law of demand and supply. A market runs through demand and supply, and before understanding the law of demand and supply, it is very important to understand the concept of demand and supply. Demand can be referred to as the consumer’s desire to purchase goods and services, and the customer must also have the willingness to pay for the availed goods and services. Considering this, some factors are taken as constant, and the demand for a particular good or service is considered. The two major components that affect the demand are the price of the goods, and the amount of that good demanded: the quantity of the good (Inoua and Smith, 2020). The basic relationship between the price and the quantity demanded is that considering other factors constant, if the price of the good increases, the demand for that particular good decreases, whereas if the price of that good decreases, then the demand for that particular good increases. For example, Rita normally buys three pens in a week, but if she gets the news of a decrease in the pen, she can afford five pens at that same price; therefore, a decrease in the price increases the demand. Again, considering the same example, if the pen’s price rises, then maybe she can afford two pens instead of three. Therefore a rise in the prices can decrease the demand. So basically, the law of demand states that all other factors being constant, the price and demand of the goods and services are inversely related to each other. But there are certain exceptions to the law of demand. In the above scenarios, some factors are kept constant, but those factors do not stay constant in all scenarios. Hence, it is important to discuss those factors affecting the demand. So the different exceptions to the law of demand are firstly Giffen goods. For Giffen goods, if the goods’ price increases, then the demand for the good also increases. This is a reason after Giffen goods being referred to as inferior goods. The second exception to the law of demand is Veblen goods; it also has the same definition that a price increase also increases in goods demanded. Now coming to the supply of the goods, the general law of supply is another factor being constant; the relation between price and quantity supplied is directly related to each other (Valentinov and Thompson, 2019). The clarification is that if a good increase increases, the supply of that particular goods also increases. This law of supply also has some exceptions, and they are if the goods are the result of changing business, if the goods are from a monopoly market, if the goods are perishable and if the goods are from the list of auction goods.
References:
Inoua, S.M. and Smith, V.L., 2020. The Classical Theory of Supply and Demand.
Valentinov, V. and Thompson, S., 2019. The supply and demand of social systems: towards a systems theory of the firm. Kybernetes.