Supply and Demand: how They Determine Commodities' Prices - Essay Example

Thus, reflecting the direct relationship existing between the quantity of a commodity supplied and its price. Taking an example of HIV vaccine drugs and making assumptions that the prices of the drug will not be controlled nor affected by any other thing, apart from prices then this would be presented in a graph. This is as illustrated by the figure below; Fig 1: The relationship between price and quantity supplied of HIV drugs Price of HIV drugs (in USD) Supply curve 0 quantities supplied of HIV drugs (in packets) (Hoag Arleen J and Hoag John H, 2006 p74) On the other hand, the law of demand says that the higher the level of price of a commodity the lesser will be the demanded quantity of the same commodity if other things remain constant.

Therefore, the only approach to triggering bigger quantities of a commodity’s demand by consumers is by reducing the prices of that commodity. To show the law of demand works and to understand the reverse relationship between quantities demanded of a commodity and its prices the graph below will be used. (Note that the same example of HIV drugs will be used but this time round it will be quantity demanded, other things remaining constant) Fig 2: The relationship between price and quantity supplied of HIV drugs Price of HIV drugs (in USD) Demand curve 0 quantities demanded of HIV drugs (in packets) (Depken, 2005 p7) The system where prices of a good are determined by supply and demand forces is referred to as a market economy.

The reason why it is called a market economy is because the forces of the market which in other words are the market mechanism towards determining the prices of a good are allowed to operate so as to reach the price where the market will be at equilibrium. Societies in entirety usually make economic choices or decisions. At any given moment in time, the society needs to choose what is to be produced, how the same should be produced and who is allowed to consume the commodity. As far as conventional economics is concerned, the market via demand and supply provides answers to the mentioned questions.

The prices of any given commodity, under conditions of a competitive market, are determined by the market. In other words, the market is formed by the entire group of consumers in one hand and the whole group of producers in the other. Therefore, the price is the major determinant of what is to constitute production and which consumer is to afford that commodity. Prices motivate both producers as well as consumers. If prices are high, then this is a call for producers to produce more and reap the benefits, but there will be less consumption of the same commodity due to very high prices.

The opposite is where prices are lower and this motivates consumers to consume more and producers to produce lesser amounts of the commodity in question. These two incentives ensure that prices are pushed to balance both supply and demand. That is, supply (production) and demand (consumption). Equilibrium is where the quantity demanded is equal to the quantity supplied. Thus, the prices of a commodity are equal at this point. Using the previous graphs, equilibrium can be illustrated as follows: Fig 3: Market equilibrium of HIV drugs Price of HIV drugs (in USD) Demand curve supply curve Point of market equilibrium 0 quantities demanded of HIV drugs (in packets) (kr.mnsu.edu, 2011) Simply, markets exist only in a situation where