Money and Finance – Deflationary and Elastic Price Curves
In economics, demand and supply are an economic theory of price determination on a market. It states that, holding other things constant, the optimum unit cost for a given good, i.e. the lowest price level will be reached if demand from consumers falls below the level of supply. It is widely used as a fundamental economic concept in many areas of business thought. For example, it is a principle in deciding what tax rate to adopt, under which form of taxation, and in how much social security is supplied to an elderly person or a disabled person.
The basic demand and supply relationship has also been used as a principle in international trade. A nation that desires to trade with another nation must be able to satisfy its needs if it wishes to do so by demanding more of the other nation’s product, while giving a similar return in the form of goods in return. It has also been used to decide where to invest capital in terms of the location of factories, farms, businesses and infrastructure. It determines which countries should belong to what political region. In the context of immigration, it determines who should be allowed to live and work in a country.
A general equilibrium may be defined as the point at which demand meets supply. In economics, however, there are a variety of situations that may lead to the formation of a general equilibrium. A fluctuating economy may enter a state of demand and supply at different times, causing prices to change abruptly. Changes in aggregate demand due to increases or decreases in aggregate supply due to changes in aggregate supply are called changes in the inflation rate or elasticity of demand. Deflationary periods are periods of high inflation or low inflation respectively, which are characterized by substantial variations in the prices of essential commodities.
An economy normally enters a state of demand to supply, where the supply of a commodity is equal to the demand supply divided by the total population of the country. In a deflationary economy, prices of essential commodities are decrease, leaving a discrepancy between the supply of the commodity and its demand. In an equilibrium point, the equilibrium lies in the mid-course of the trendline, which marks the difference between the supply of the commodity and its demand. This marks the point at which the equilibrium is broken.
The concept of demand and supply are not only related to economic theories. They are also related to the concepts of business cycles. A business cycle is a process whereby, a specific quantity of a commodity is bought to be sold again at a later stage. In a buyer-seller relationship, the supply of a commodity controls the price of the commodity, on the one hand, and the demand for the same commodity, on the other.
General market price curve depicts the movement of the demand and supply curves. On one end of this curve, it marks the highs and the lows of demand and the opposite end, it depicts the highs and the lows of supply. Curves are not simple lines. In fact, they are complex, irregular shapes, often representing different prices ranges for the same commodity. For instance, the curve connecting the high cost stock of the U.S.A. with the low cost of Japanese Knotweed, which is commonly used as an insecticide, shows a sharp rise and fall of prices, punctuated by sharp fluctuations.