SUPPLY AND DEMAND

Supply and Demand

Supply and Demand

Question 2

There is no more precise definition of the market, than that given above. In fact, the main task of any open market is bringing together sellers and buyers. The relationship between the buyers and sellers are regulated by the law of supply and demand. This fundamental law makes stock prices rise or fall, which in turn allows traders to profit or loss from the price difference between the future and the present prices. Trader should know the mechanism of the balance changing between the supply and demand, so let's consider the following table [3]:

Table 1-1. The Market supply and demand of corn (in thousands of bushels)

Here is the connection between corn sellers and buyers, expressed in terms of its price and delivery volume. Sellers wish to sell their goods as expensive as possible, and buyers wish to buy it as cheap as possible. In this case, at corn cost of $ 5 per bushel, there are many sellers who would like to sell it. Their total supply will be 12 000 bushels. But the seller's problem is that there aren't so many buyers who are ready to buy it at such a high price. There are buyers who are ready to buy only 2 000 bushels at such a high price. The other 10 000 bushels (12 000 - 2 000 = 10 000) remain unfulfilled, causing goods surplus from sellers, and goods shortage from buyers. This price is unable to stay on the market. Many sellers will cut their prices just to get rid of goods surplus and get even smaller, but live money. They will join other sellers who wish to pre-empt his fellow competitors. The competition among sellers will begin, which will decrease prices .

Now let's consider the opposite case. At this time we assume that the corn price is very low - $ 1 per bushel. Such corn price will be very attractive for buyers, there are many buyers who wish to buy it. Their total demand is 16 000 bushels. But there would be much less sellers who want to sell at that price. The total supply (sales) amount is just 1 000 bushels, which again will cause goods shortage among the buyers in the amount of 15 000 bushels, and surpluses from sellers. Again, this price is not able to stay on the market. Some of the buyers will buy the corn at a higher price, to get the goods they need. These buyers will join their colleagues and anticipate further growth of the prices and want to be among the first who bought it relatively cheap. The competition among buyers will begin, which will increase the price.

To make it clear let's draw the functions of demand and supply on the graph:

Figure 1-2. Demand and Supply as function of the price

We have considered only the extreme distribution cases between the demand and supply. In the first case, the price will fall, in the second case, the price ...