Price also stimulates firms and industries into production process due to high profit guaranteed when a firm is involved in a large-scale production. Lastly, price help in the distribution of income and resources to the most efficient industries in the market. It is the price that the government budget for it functions to provide services and development to steer economic growth (Moon 2013). The increase in demand is the increase in the quantity of goods or services that consumers need for consumption. For example, if households were used to consume bread in a day, but over sudden, they start consuming two or more bread per day this situation is what is referred to an increase in the demand for bread.
However, decrease in consumption of bread from one to half, the reduction is said to be a decrease in the demand for bread (Sloman 2012). The supply of goods refers to the productions and transportation of commodities to the availability of consumers in the market. An increase in the supply is the production and delivery of more goods or services than what is required by consumers.
On the other hand, a decrease in supply is a production of fewer goods by firms and delivery of goods or services less than what is needed by consumers in the market. The changes in the demand and supply determine the prices of goods or services at any given time (Sloman 2012). High demand results to increased prices of goods and services while low demand creates a surplus and reduces prices of commodities. The changes of demand and supply through the price mechanism raises or decreases the prices of the commodity in the short run, but the prices stabilized in the long run to the equilibrium position. An extension in the demand comes as a result of the fall in prices of a commodity.
Therefore, an increase in demand as a result of a decrease in the cost of the commodity is what is referred to as an extension of demand. On the other hand, a contraction of demand is a decrease in the quantity needed by consumers as the prices of goods and services increases.
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