|Economics Basics||Supply and demand relationship|
What Is Economics
Macro and Microeconomics
Production Possibility Frontier (PPF)
Specialization and Comparative Advantage
Demand and Supply
The Law of Demand
The Law of Supply
Time and Supply
Supply and Demand Relationship
F. Shifts vs. Movement
The availability of substitutes
Income available to spend on the good
Income Elasticity of Demand
Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price.
Imagine that a special edition CD of your favorite band is released for $20.
Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will
not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten
CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too
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