In addition to pricing as an area in Microeconomics, it also explains the impact of supply and demand variations upon the consumers, sellers and the service providers. ‘ In other words, microeconomics is the analysis of the decisions made by individuals and groups, the factors that affect those decisions and how those decisions affect others’ (Moffat, 2009)Supply and demand is a key factor in microeconomics since there exists a delicate balance between these two concepts or activities. Primarily, the economic activities in the market always depend on the supply and of the goods.
When the supply increases, the price may come down and more customers will participate in purchasing. On the other hand, when supply decreases this leads to increased demand; thus, the price of the goods may go up which will prevent some customers from buying. “ The law of demand states that, if all other factors remain equal, the higher the price of a good, the fewer people will demand that good. In other words, the higher the price, the lower the quantity demanded” ( Investopedia. The demand law can understood even by a common person.
Normally, nobody will purchase expensive goods if cheaper substitutes of similar quality are available in the market. On the other hand, in the absence of substitute products, the buyer may force to buy certain goods even if it is expensive. However, the number of goods purchased for a higher price would be less in volume or quantity compared to the number of goods purchased when the prices are low. For example, the Indian car manufacturer Tata group has recently launched a car called for a price as low as $2000.
Many consumers who were using motorbikes for their traveling needs earlier switched to Nano because of the cheaper price. Before, it was difficult for them to bear a car which was priced more than $ 10000 earlier. The law of demand can be summarized as shown in the curve given below. “ A, B, and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity will be Q1 and the price will be P1, and so on.
The demand relationship curve illustrates the negative relationship between price and quantity demanded.
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