DEMAND AND SUPPLY
Demand of a given commodity refers to the amount or the quantity of the commodity, a consumer is willing to buy at a given time and given price. Furthermore, the curve moves downward in a graph from left to right. Which represents the inverse relationship between price and demand.
Supply of a given commodity refers to the quantity of the commodity, a seller is willing to sell at a given price and given time. Furthermore, the supply curve moves upward from left to right in a graph. Which represents the direct relationship between price and supply.
LAW OF DEMAND AND SUPPLY
- The Law states that the demand of a good rises and the supply of a good falls when there is a rise in the price of the good.
- Therefore, there is an inverse relationship between quantity demanded and price of a given commodity. And, a direct relationship between supply of a good and its price.
- Market Equilibrium refers to the state where the quantity demanded is equal to the equilibrium quantity and the price is equal to the equilibrium price. This happens at the point where demand and supply curve intersect.
- Here, the point where Demand curve meets the Supply curve is known as Equilibrium point.
- Sometimes, the government interferes in the market process and set maximum (LOW) price limits for some basic goods, known as Price Ceiling.
- If the government regards the equilibrium price as too high, it may fix a ceiling price at OP1. But, this will result in shortage of the good, i.e.excess demand (OQ1) over supply(OQ2).
- In this situation, the government may introduce rationing so that the limited goods may be allocated among all the buyers who want them.
Agricultural Price Support
- The government, fixes minimum prices (price floor)—
- To protect farmers’ incomes from price fluctuations of farm products, and
- To create buffer stocks to prevent any future shortages of farm products.
- The specified level of minimum prices is called price floors. Under the Price Floor, it is legal to undertake any transaction.
- At this price floor OP1, mentioned in the below figure, while the demand falls to OQ2, the producers are willing to sell OQ1 quantity, resulting in a surplus (Q2Q1), which the government buys as buffer stock.
- The consumers, ultimately have to pay a higher price than the equilibrium price OP.
- Solutions undertaken by the government:
- Supply to grow certain agricultural commodities.
- Stimulating demand , and
- Purchasing surpluses i.e., certain farm products are bought and stored by the government for future use as “BUFFER STOCKS”.