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Supply and Demand Question?
Please tell me if I am correct with the basic principles of supply and demand. Correct me where I am wrong. Please understand that I am using the words low and high subjectively, low doesn't exactly mean $1 and high doesn't exactly mean $50,000. Also, feel free to add anything I may have missed. I feel like I'm missing something
Something is in low demand, the cost is low
Something is in high demand, the cost is high
correct1 year ago
Maybe...something could be in either high or low demand and the cost could be either high or low for both. For example, a Ferrari is in low demand yet commands a high price. The reason for the low demand is because the price is high and the price is high because supply is low.
Cost/price is more relevant to the ratio or relationship between demand and supply with the basic principle of supply and demand's affect on price being that price changes depending upon changes in supply and/or demand. Another way to put it - compare two items that can be substitutes - a McDondald's hamburger and a Peter Luger hamburger. Both are on the face the same product. The mcD's hamburger price is about $1, the Peter Luger hamburger price is about $25 - by your logic, the cost/price of the Luger-burger should translate into high demand. However, McDonalds sells a lot more of the $1 burgers than Lugers sells of the $25 burger (meaning demand is higher for the low cost burger). If McD's raises their price to $1.25, all else being equal, demand goes down - higher price less demand. However, if McD's raises their price to $1.10 but Luger's raises their price to $27, assuming static demand for hamburgers, the demand for McD's will increase while that for Lugers will decrease. But if someone comes in, say BK and offers a burger similar to McD's for $1, McD's demand will go down even though their $1.25 price did not change.
Demand is the amount of a product that customers are prepared to buy at a variety of prices.
Supply is the amount of a product businesses are prepared to sell at a variety of prices.
High demand does not necessarily mean that the cost of the product is high. You have to take into account supply as well as demand.
The market prices change as supply and demand changes. So, if a supplier runs a successful advertising campaign that results in an increased demand they may increase the price of the product.
Where the supply of a product is increased, (e.g. if more companies start supplying the same product), the price is often lowered to compete with the flooded marketplace.