Demand and Supply and how is price determined

Demand can be defined as the amount of a particular good or service that a consumer or group of consumers will want to purchase at a given price. Hence the demand curve is usually downward sloping, since consumers will want to buy more as price decreases and less when price increases. In contrast supply can be defined as the total amount of goods or services which are available at a given price. Hence the supply curve is usually downward sloping, since producers of goods and services will want to sell more as price increases and less as price decreases.

So how the price is decided for which goods and services can be exchanged, well it can be understood with following example

Price Demand for crude (gallons) Supply of crude (gallons)
10 $ 1000 600
20 $ 800 800
30 $ 600 1000

In the above example if price is 10$ then demand will be 1000 gallons and supply will be only 600 gallons while if price increases to 30$ then demand will fall to 600 gallons while supply will be 1000 gallons. It is at 20$ that both demand and supply will be same and it is at this price exchange will take place between buyer and seller.

Well to the above example one can include certain external factors which can affect both demand and supply and come with different price for exchange of crude.

1 comment… add one

Leave a Comment