- Understand the law of demand and how it is visually represented
- Understand the law of supply and how it is visually represented
- Understand surpluses and shortages
- Understand equilibrium price and quantity
- Identify factors that can change supply and demand
Microeconomics
Now let’s shift to microeconomics, the study of households, businesses, and industries. This field within economics is concerned with how individual people and businesses affect the prices and quantities of goods and services in a free market.
Consumers in a free market influence what is produced. As Mexican food became part of mainstream food culture in the United States, demand increased. The higher demand attracts entrepreneurs who opened more Mexican or Mexican-inspired restaurants (think Taco Bell and Chipotle) . They want to compete for our dollars by supplying food at a lower price, better quality, or with different features, such as combining Korean barbecue or Southern fried chicken with tacos. This section explains how business and consumer choices influence the price and availability of goods and services.
The Nature of Demand
law of demand
Demand is the quantity of a good or service that people are willing to buy at various prices. According to the law of demand, there is an indirect relationship between price and the quantity consumers are willing to buy. The higher the price, the lower the quantity demanded. Lower prices will correspond to higher quantities demanded. A graph of this relationship is called a demand curve.
Let’s assume you own a clothing store that sells winter coats. From past experience, you know how many coats you can sell at different prices. The demand curve below shows this information. The x-axis (horizontal axis) shows the quantity of coats, and the y-axis (vertical axis) shows the related price of those coats. For example, at a price of $100, customers will buy (demand) 600 coats.
In the graph, the demand curve slopes downward and to the right because as the price falls, people will want to buy more coats. Some people who were not going to buy a coat will purchase one at the lower price. Also, some people who already have a coat will buy a second one. The graph also shows that if you put a large number of coats on the market, you will have to reduce the price to sell all of them.
Why Demand Matters
Understanding demand is critical to businesses. Demand tells you how much you can sell and at what price—in other words, how much money the the business will take in that can be used to cover costs and hopefully earn a profit. Predicting demand is difficult even for the very largest corporations, but particularly for small firms.