Individual Demand Curve and a Supply Curve Term Paper

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Supply and demand are two fundamental aspects of economics. It is the combination of these elements that makes up a market. Therefore, it is paramount to understand both concepts in order to appreciate the mechanisms of economic theory.

Supply is the ability and willingness of merchants to provide commodities for sale. Quantity supplied is a definite amount of goods at established prices. A supply curve depicts the connections between the price and quantity supplied of a good or service within a certain time period.

In order to understand supply curves, one must also comprehend the law of supply, production costs, marginal costs, and profit maximization. The law of supply states that as the price of an item rises the quantity supplied similarly increases. As the price falls, so too does the quantity supplied. In other words, there is a positive relationship between price and quantity supplied.

Another major factor in determining a supply curve are the costs of production. Production costs usually include inputs, or factors of production, and technological advances. Factors of production are divided into two categories: fixed costs and variable costs. Fixed costs are those expenditures that remain constant when changes in output occur; they may include rent, taxes, and interest payments on debts. Variable costs, on the other hand, change along with levels of output. Labor, raw materials, and electricity are examples of variable costs. Rising variable costs force the market price of a product to rise as well. This may affect the quantity supplied. Low production cost relative to market price makes an item profitable and provides an impetus for increased supply. Inversely, high production costs in relation to price render a good unprofitable. This leads to either a reduction in production or a change of business.

Technological advances also impact production costs.

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Improved technology makes production more efficient. Stated differently, it takes less to produce more. A more efficiently run business typically means lower prices and, consequently, more buyers.

Marginal cost is the additional cost of producing one more unit of a good or service. Marginal costs vary with the amount of output. For example, it may cost one dollar to produce one additional unit, fifty cents to create two items, but three dollars to produce a third. Marginal costs decrease to a certain amount and then rise again. An increase in the cost of input must be examined closely to determine its effect on profits. For this reason, a firm will continue to expand production so long as marginal revenue -- the additional revenue from creating one more unit, exceeds marginal cost.

A firm is primarily in business to make a profit. It follows that a company's objective is to maximize profits. Adjusting production to the level of output where profits are as high as possible accomplishes this goal.

A supply curve illustrates the relationship between price (y axis) and quantity supplied (x axis) for a given period of time. Supply curves slope upward and to the right. This is an indication of the law of supply, the positive correlation between the two variables.

Demand is the desire of consumers to obtain goods and services. It refers to a whole array of prices of a commodity and its corresponding levels of demand. Quantity demanded is a precise quantity of goods requested at a specific price. A demand curve illustrates the relationship between the price and quantity demanded of a good or service within a determined period of time.

In order to understand demand curves, one must also understand the notions….....

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