The theory of supply and demand is the basis of the market model that prevails in most developed countries. The relative simplicity of formulations, visibility and good predictability have led to the fact that this concept has gained immense popularity among scientists and economists around the world.
The foundations of the theory of supply and demand were laid down by the famous apologists of the market economy A. Smith and D. Ricardo. Subsequently, this concept was supplemented and improved until it acquired a modern look.
The theory of supply and demand is based on several basic concepts, the key among which are, of course, supply and demand. Demand is a significant economic value that characterizes the need of consumers for a particular product or service.
Scientists distinguish several classifications of demand. For example, there is an individual demand, that is, the need of a particular citizen for a certain product in the market in question, and the aggregate, that is, the total value of demand for certain goods and services in a particular country.
In addition, the demand is primary and secondary. The first is the need for a clearly selected product category as a whole. Secondary demand indicates interest in the products of a particular company or brand.
The theory of supply and demand defines the latter as the quantity of goods on the market at a particular point in time that manufacturers are willing to sell. It should be noted that supply, like demand, can be individual and aggregate, and the latter type implies the total volume of goods offered in a particular country.
The main factors of supply and demand can be divided into several groups. The first should include those that are not directly dependent on the activities of buyers and manufacturers. First of all, this is the general socio-economic situation in the country, state policy in the sphere of production and consumption, competition, including from foreign organizations.
Internal factors include how competitive the products of this manufacturer are, how competent the pricing and marketing policies are, as well as the level and quality of advertising, the income level of citizens, changes in indicators such as fashion, taste, preferences, habits.
The basic laws on which the theory of supply and demand is based are the laws of precisely these economic categories. Thus, the law of demand proclaims that the quantity of goods, under certain unchanged conditions, increases if there is a decrease in the price of this product. That is, the magnitude of demand is inversely proportional to the price of the goods.
The law of supply, on the contrary, establishes a direct relationship between the size of the offer and the price: under certain unchanged conditions, an increase in the price of a product leads to an increase in the number of offers in a given market.
Demand and supply are not torn from each other, but are in constant interaction. The result of this process is the so-called equilibrium price, at which the demand for this product is fully consistent with the supply.