Modeling Supply and Demand - A discussion series

When I generally go to shop, I search for a particular item ‘A’ and have a mentally fixed price I intend to pay (assume we don’t have a price tag here). Then I find another item ‘B’ with all the features of ‘A’ (exclude brand and similar intangibles for the moment); given my expectation both these would have to be of the same price. I then ask their price to the sales person there - he say ‘A’ cost ₨ 25/- and ‘B’ costs ₨20/-. Now I would definitely opt for the item ‘B’. This mentality is pretty common amongst people and is summarised by the Law of Demand - “if all other factors remain equal, the higher the price of a good, the less people will demand that good.” i.e - the higher the price, the lower the quantity demanded. We represent this with the Demand Curve.

Now assume, I am a vegetable vendor who has his own farm which has innumerable cucumbers. I take some cucumbers to the market and try selling it at ₨10/- each. One of my customers comes to me and asks if I am interested in partnering with him - and he says he would provide ₨15/- per cucumber for as many as I give. I have an incentive to tie up with him since I would be getting a higher price than the earlier price I used to get. This is pretty common - the more some one is ready to pay for something, the more we produce to cater to it. This is summarized by the Law of Supply. This is generally represented by the Supply Curve.

We shall explore more about these in the coming blogs. The idea of these blogs is to understand the decision making process better.

Read the Kannada Article here:http://somanagement.blogspot.com/2011/02/blog-post_15.html