"This is the basic principle of supply and demand and is at the heart of any market-based economy. Essentially, you must look at supply as the quantity that is available of a given product. Demand refers to the relative number of people who want that product. The greater the demand, the harder it is for the supply to meet that demand. Producers can only create a certain amount of any one product in a given amount of time and with a sometimes limited set of resources needed to create that product. As a result, quantities (supplies) are limited, making them more valuable and, consequently, making people who can afford to pay more willing to pay more. Sometimes, even people who cannot afford to pay are willing to pay the price if the demand is great enough. Conversely, when the supply ourweighs the demand, you end uo with a surplus. The suppliers have created a product that consumers are not purchasing rapidly enough. In this case, proces will be dropped in order to encourage people to buy the product and reduce the supply."
"This is for the same reason that increased demand leads to higher prices in microeconomics.
The idea is that there is greater demand, which means that there are more people who are willing to buy a given product. When that happens, the people are typically willing to pay higher prices because they know that if they do not pay that price, someone else will and the product will be gone.
So when there is more demand, there is more "money chasing goods" and the prices have to rise and you end up with demand-pull inflation."
Why does the price increase when demand increases?
Why does the price increase when demand increases? Wouldn’t the price increase lower the demand and the seller prefers a higher demand over a lower demand?
The price doesn’t always increase when the demand increases. It can decrease as well.
The concept of price increasing when demand increases is assuming supply is constant. If supply is constant, a higher demand allows for a higher price to sell the same number of goods.
A seller will always want to sell all his product. If a Baker can make 100 loaves of bread a day, he will set the price as high as the market will allow so that he sells all 100 loaves every day. If demand increases he will sell out faster at the same price, so he will be able to raise his rates and still sell all his inventory.
An increase in demand will create an increase in prices if the supply is close to constant.
But an increase in demand can also generate an increase in production and an increase in production can create savings per piece due to economies of scale, which would drive the price down. If a car company can only sell 10 cars a year, the production cost per car will be very high. But if they can produce 10,000 cars a year, there are endless ways to lower the cost per car by investing in mass production equipment. At 10 cars a year, the cars might cost $100,000 to produce each. At 10,000 a year, they might only cost $20,000 to produce each. So a large increase in demand can create a lowering of the cost.
Wouldn’t the price increase lower the demand and the seller prefers a higher demand over a lower demand?
Price increase doesn’t change demand. In economic terms, demand is a reference to how useful a good is to the customer. No matter how much a car sells for, how useful the car is to a given customer does not change (ignoring psychological effects of price as a status symbol).
The demand curve is a measure of how useful the product is to different customers by how much each would be willing to pay for it. I may like a car, but I can only justify paying $100 for it. Others might have a greater need, and be able to justify spending $100,000 for the same car. This difference between what we each consider the car worth to us, is the demand curve.
So in economics, if they say “demand increases” it means people are willing to pay more for it. So by very definition, if demand increases, it means the same product can be sold for more if the production volume doesn’t change because of the change in demand.
True demand has it’s root in fundamental human desire, not in economics. It’s a subjective measure of how important a good or service is to a person relative to other goods and services. So when we say demand increases, we are suggesting people have changed their view of what is important to them and they want more of a product than they did in the past. When need for a product increases, the price you can sell it for naturally increases. When there is a power outage, the need for ice increases, and the price of ice increases because there is no way to increase the supply fast enough to meet the new higher demand.
But if ice were simply to become a far more popular product for people to buy, then the companies producing and selling ice might be able to produce it for less, due to economies of scale and so the price would go down over the long term due to the long term increase in demand.
RMN is an RA production.
The only pay your RMN moderators receive comes from ads.
Please consider putting RMN in your ad blocker's whitelist.
Serving Truth and Freedom
Worldwide since 1996
Politically Incorrect News
Stranger than Fiction