Economics is a very important discipline of modern commerce, that has been progressing since the era of barter exchange. After the industrial revolution and modernization of the globe, this discipline has received a special importance and also a significant practical base. Economics is often defined as the art, science, and mathematics of human needs and ways to fulfill human needs. There are many economists who have come up with a number of theories, in order to define the satisfaction of human wants and monetary and non-monetary means of addressing these wants. David Ricardo, Adam Smith, and James Denham Steuart are probably the first three, who have advocated and improvised the theory of demand and supply. If you are a student of economics, statistics, or finance, then this analysis and its theory are your new religion as it forms the basis of all concepts of economics and finance, along with monetary, fiscal, and statistical theories.
The genesis of the relation between the two can be traced back to 1767, when James Denham Steuart used the term in the book, Inquiry into the Principles of Political Economy. The actual logic of the concept of demand and supply was used by economics legend Adam Smith in his book Wealth of Nations. The analysis was further enhanced by some of the laws that were put forth by David Ricardo in the book Principles of Political Economy and Taxation. Though every economist used some or the other different theory and analysis in the process of explaining the statistics of this concept, the basic logic that is used is the same.
Any transaction has two dimensions, namely a demand and a supply. Let us take an example of cheesecakes. The number of cheesecakes that can be produced becomes the supply quantity, and the number that have been purchased and consumed, or can be purchased, becomes the demand. In any market, the number of units of a commodity that a consumer has the will and ability to pay for, becomes the demand for that particular commodity in the market and any producer that has the will and ability to produce those units becomes the supply. It is not necessary that both these volumes will match. The aggregate demand and supply analysis is based on this difference between the two forces. You can have a look at the diagrams of laws regarding the same. According to these graphs, we can put forth 3 conditions:
- More Supply, Less Demand: This kind of situation is known as surplus. Prices of goods in such a situation are low; this implies that more the supply, lesser is the cost.
- More Demand, Less Supply: This condition is known as deficit of supply. In such a situation, there is more demand and less supply, which leads to a rise in the price level. The lesser the supply, the more is the price and more the demand, higher is the price.
- Equilibrium: This is the ideal stage in any market. In such a situation, the price is not very less and also not very large; it is precise. Such situation is desirable in any market as it ensures a great level of price stability.
In the above diagrams, the intersection of the two curves decides the price of commodities. Movement by any of the curves raises or decreases the price of the commodity. For example, if the demand curve shifts in an upward direction, then prices are bound to rise, and if it moves in a downward direction, prices tend to fall. On the other hand, if the supply curve indicates a fall, then prices are bound to rise drastically. It typically works similar to the balance, where one fall leads to an opposing rise.
It must be noted that this principle is applicable for all the transactions that take place throughout the world. Hence, understanding this analysis is an absolute necessity.