Supply and Demand Essay Example | Topics and Well Written Essays - 250 words

Supply and Demand - Essay Example The law of demand in economics states that with all aspects (tastes, expectation, and income) held constant; highly priced commodity will have a low demand (D1). Whereas, that of supply argues that with an increase in supply, the price (P1) of commodity will significantly reduce. An increase in demand (D2) along the curve of supply results to increase in the price (P2) of commodity; and a higher equilibrium quantity. Similarly, a reduction in the level of supply (S1) leads to a shift of the demand curve; to a high price on the equilibrium and a reduced equilibrium quantity. Efficient market theory refers to an analysis in a free market system regarding behavior of prices. It is tasked with the responsibility of determining whether prices accurately reveal essential information; necessary in determining the proper allocation of limited resources among diverse uses (Slee, 2011). Surplus implies that the capacity in demand is lesser than that supplied; whereas shortage exists when the quantity demanded is lesser than that supplied. In addition, in a situation where surplus exist there will be a constant drop of prices; similarly, shortage influences increased pricing (Market Equilibrium