Author: angelliu

Definition: Complementary goods are two or more goods typically consumed or used together, such that a change in the price or availability of one good affects the demand for the other good.

Example: As we can see from the graph below; when the price of an iPhone decreases, the demand for iPhone cases increases. This is because the demand for iPhones increases as more consumers are buying it at the lower prices. In turn, those same consumers are demanding iPhone cases – which translates into high sales.

Definiton:

Economic theory describes two goods as being close substitutes if three conditions hold:

1. products have the same or similar performance characteristics
2. products have the same or similar occasion for use and
3. products are sold in the same geographic area

Example:In the diagram on the left, there is a fall in the price of Android Phones causing consumers to demand more. (movement along the demand curve).

• As a result, there is a fall in demand for the substitute (Apple iPhone) leading to less demand.

Supply and demand is a core concept in microeconomics that explores the relationship between the availability of goods or services (supply) and consumers’ desire to purchase them (demand). Supply represents the willingness of producers to sell at various prices, while demand represents consumers’ willingness to buy at different price levels. The interaction of supply and demand determines the equilibrium price and quantity in a market. Understanding supply and demand helps businesses make production decisions, governments implement economic policies, and consumers make informed choices. It provides insights into market trends, pricing patterns, and resource allocation, shedding light on how economies function.

Inside the concept of demand and supply, demand basically stands for the customer’s desire to purchase goods and services. In other words, it could be calculated as the price the customers are willing to pay for the goods and products. A simple principle exists for demand, which is when the price goes up, the demand drops; while the price goes down, the demand rises. For example, Mr. James is running out milk for breakfast at home, so he comes to the supermarket to buy milk. In this case, his demand is to buy the milk. However, if the price for the milk rises, the demand for the milk will drop since Mr. James does not want it to be expensive; but when the price falls, the demands for Mr. James will rise since he wants to buy the same product when it is cheaper. 

Supply refers to the total amount of specific products and services that is available for customers, which is provided by the suppliers. With the goal of earning profits, the suppliers and companies are always more likely to manufacture products at a higher price. For supply, there is also a simple principle that if the price of goods is low, the supply is also low; when the price of goods is high, the supply is also high. For example, in the supermarket, when the price of milk is low means the quantity of milk supply is also low, while when the price of milk is high means the quantity of milk is high. 

For customer:

1. The demand and supply provide the customers with an overview of price changes in their desired products. Most people would tend to purchase the products at relatively lower prices.
2. A contradiction always happens when the customers demand more on a product; both the quantity and price of the products are more likely to increase simultaneously.
3. Conversely, both the quantity and price of the products will be on a downward slope when the customers have less demand for the products for varied reasons.

For business owner:

1. The demand and supply knowledge could help business owners to maintain an equilibrium price for their products to maintain a steady supply of goods and services and drive profitability (Mailchimp, n.d.).
2. When they understand the customers’ demand, they can forecast the demand for their products, which helps them maintain an adequate inventory while minimizing lost sales.
3. By understanding the supplier’s conditions, such as the supply power, including supply prices and quantities, the business owners could “shop around” and find the optimal supplier, bringing the company immense profits. 

For supplier:

1. The demand and supply could provide the supplier with a valuable model to determine the price and quantities to avoid troubles such as unusable or overstocking, which wastes a lot of costs.
2. According to the business owners’ and customers’ demands, the suppliers could set a price that all three parties could accept while still being profitable.
3. Unlike the customers, when the prices of the products are relatively high in the market, the suppliers may desire to produce more because they could obtain higher profits. However, it also depends on the customers’ demand because if the demand is relatively low, the suppliers may be responsible for the risks of loss. 

As the diagram on the left shows:

Surplus: The economic surplus “describes the amount of an asset or resource that exceeds the portion that’s actively utilized” (Kenton, 2023). The phenomenon could be explained with an example of more products being produced than the customers’ demand. It always happens in the economic system and results in an unsold situation for the suppliers and the business owners. From the diagram, the surplus is located above the interaction point of the demand and supply slope, with the demand in a downward trend and the supply in an upward trend; reducing both the quantities and the prices may improve this problem. 

Shortage: Conversely, the economic shortage “is a condition where the quantity demanded is greater than the quantity supplied at the market price” (Chen, 2022), which means the customers demand more on the products but the quantities are inadequate in the market. As a result, the sellers of the products will be more likely to increase the prices because of the high level of demand. From the diagram, the shortage is located below the interaction point of the demand and supply, with the demand in an upward trend and the supply in a downward trend; increasing both the quantities and the prices may improve this problem. 

The diagram on the right describes the relationship among Price, Quantity, Demand, and Supply, a few conclusions are drawn upon it:

1. Supply is generally considered to slope upward:
   • An increase in supply causes the decrease in price.
2. Demand is generally considered to slope downward: 
   • An increase in demand causes the increase in price.
3. As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows.
4. If there is a shortage of goods, the quantity demanded exceeds the quantity supplied. If there is a surplus, the quantity supplied exceeds the quantity demanded.
5. Supply and demand interact in the market in several ways to determine the market equilibrium.

Definition: The optimum equilibrium in supply and demand occurs when the quantity of a product that suppliers are willing to provide at a certain price matches the quantity that consumers are willing to buy at that price. In short, quantity supplied matches the quantity demanded at a particular price. This equilibrium point is where the supply and demand curves intersect.

Example: At the optimum equilibrium, both buyers and sellers are satisfied and benefited . Buyers are able to purchase the quantity they desire at a price they are willing to pay, mean while sellers are able to sell their goods or services at a price that covers their costs and provides a reasonable profit.

Graph eample:

The equilibrium price and quantity would be P1 and Q1