Supply and Demand in the steel industry - Essay Example

Demand and supply in a specific industry is perhaps one of the most debated and fundamental concepts in economics. In order for a market economy to function, it is critically important that producers should supply those goods and services that consumers want and are affordable to pay for them. In economic concepts, the term demand represents the willingness and ability of buyers to buy different quantities of a product or service, at different prices during a specific period of time (Arnold, 54).

According to the basic theory of economics, people buy more quantities of a product or service at lower prices than at higher prices. The price and demand relation is well debated in the theories of economics. When price of a commodity decreases, it is assumed that consumers will buy more quantities of that product or service, and thus its demand increases. The term supply refers to the willingness and ability of producers to produce and sell different quantities of a goods or service at different prices for a specific period of time (Arnold, 66).

According to economic theory of law of supply, the quantity supplied of a goods or service increases when its price increases. From the explanations given above, it is clear that demand and price is indirectly related whereas price and supply are directly related. There are many determinants of quantity supplied, but out of all the determinants, price plays pivotal role. The underlying assumption is that when the price of steel becomes high, selling steel become profitable and the quantity supplied, therefore, will be high.

When it comes to the market, the interaction between supply and demand results one of the followings; excess supply, excess demand and equilibrium price or equilibrium quantity. Excess supply or ‘surplus’ is the conduction at which quantity supplied is greater than quantity demanded in the market. This excess supply occurs only when the price is above the equilibrium price.