Supply and Demand

Definition

Supply and demand is a fundamental economic principle that describes the relationship between the availability of a good or service and the desire for that good or service. It explains how the price and quantity of a product or service is determined in a market economy.

5 Must Know Facts For Your Next Test

1. The law of supply states that as the price of a good or service increases, the quantity supplied also increases, and vice versa.
2. The law of demand states that as the price of a good or service increases, the quantity demanded decreases, and vice versa.
3. The equilibrium price is the price at which the quantity supplied and the quantity demanded are equal, resulting in a balanced market.
4. Elasticity of demand measures the responsiveness of demand to changes in price, with inelastic demand being less responsive and elastic demand being more responsive.
5. Market clearing is the process by which the market price adjusts to ensure that the quantity supplied is equal to the quantity demanded.

Review Questions

• Explain how the principles of supply and demand impact pricing decisions in the marketing mix.
  • The principles of supply and demand are fundamental to pricing decisions in the marketing mix. The law of supply states that as the price of a product increases, the quantity supplied also increases, as producers are willing to offer more of the product at higher prices. Conversely, the law of demand states that as the price of a product increases, the quantity demanded decreases, as consumers are willing to purchase less of the product at higher prices. Marketers must carefully consider these supply and demand dynamics when setting prices, as they aim to find the equilibrium price that balances the quantity supplied and the quantity demanded, maximizing both revenue and profitability.
• Describe how the concept of elasticity of demand relates to ethical considerations in pricing.
  • The concept of elasticity of demand is closely tied to ethical considerations in pricing. Elasticity of demand measures the responsiveness of demand to changes in price, with inelastic demand being less responsive and elastic demand being more responsive. When demand is inelastic, consumers are less sensitive to price changes, and marketers may be tempted to raise prices significantly. However, this could be considered unethical if it exploits the lack of consumer options or takes advantage of vulnerable populations. Conversely, when demand is elastic, consumers are more responsive to price changes, and marketers must be mindful of the ethical implications of pricing strategies that may price certain consumers out of the market. Ethical pricing requires a balance between maximizing profits and ensuring fair and accessible pricing for all consumers.
• Analyze how the principles of supply and demand can influence the ethical considerations in pricing strategies within the marketing mix.
  • The principles of supply and demand can have a significant influence on the ethical considerations in pricing strategies within the marketing mix. When supply is limited and demand is high, marketers may be tempted to raise prices to maximize profits, which could be perceived as unethical if it exploits consumers' willingness to pay. Conversely, when supply is abundant and demand is low, marketers may be tempted to lower prices to stimulate sales, which could be seen as predatory pricing that undercuts competitors. Ethical pricing requires a careful balance between the principles of supply and demand and the need to ensure fair and accessible pricing for all consumers. Marketers must consider the long-term implications of their pricing strategies, including the impact on consumer trust, brand reputation, and societal well-being. By aligning pricing decisions with ethical principles, marketers can create pricing strategies that are both profitable and socially responsible.

Related terms

Equilibrium Price: The price at which the quantity supplied and the quantity demanded are equal, resulting in a balanced market.

Elasticity of Demand: The measure of how responsive the demand for a product is to changes in its price.

Market Clearing: The process by which the market price adjusts to ensure that the quantity supplied is equal to the quantity demanded.