The Speculator’s Edge, Four

The Speculator’s Edge, Four

Basic Economic Concepts essential to Speculation

4) The Laws of Downward-Sloping Demand and Upward-Sloping Supply

Demand is the quantity of a good that buyers are willing and able to purchase at a given price.

Supply is the quantity of a good that sellers are willing and able to sell at a given price.

The law of downward- sloping demand says that, ceteris paribus (all things being equal), demand is inversely related to price. The law of upward-sloping supply says that, ceteris paribus, supply is directly related to price. In other words, in a free market, where the non-price determinants remain the same:

  

as price increases, demand decreases

as price increases, supply increases

as price decreases, demand increases

as price decreases, supply decrease

These relationships are often depicted in demand and supply schedules and charts. A demand schedule shows the relationship between the quantity of a good demanded and the price charged. The demand schedule includes not only the amount actually demanded at the current prevailing price, but also the amount purchasers would be willing to buy at different prices.

Price……………………..Quantity Demanded

$1.50/lb………………….500 lbs

$1.00/lb………………….1000 lbs

$.50/lb………………...…2500 lbs

$.25/lb…………………...5000 lbs

$.10/lb…………………...6000 lbs

Similarly, supply schedules show the relationship between price and the amount of a good that sellers are willing to sell.

Price……………………..Quantity Supplied

$1.50/lb………………….6000 lbs

$1.00/lb………………….5000 lbs

$.50/lb………………...…2500 lbs

$.25/lb…………………...1000 lbs

$.10/lb…………………...200 lbs

The laws of upward-sloping supply and downward-sloping of demand follow our common sense. In general, if the price of a good is high, we will buy less of it than if it is lower. By lowering prices, producers can frequently entice new purchasers to buy and existing purchasers to buy more.

It is extremely important to note that while demand is inversely related to price, the relationship is not necessarily one to one. Let’s take an example. A luxury car costs, perhaps $120,000. I do not own a luxury car. If they cut the price to $60,000, I would buy one. If they cut the price to $30,000, I might not buy a second, because its marginal utility to me is less than $30,000. But if they reduce the price to $1, I might want to buy seven of them.

The law of supply operates in the same fashion. If there is plenty of something around, we are unwilling to sacrifice much to get it. As the supply becomes scarce, what we are willing to pay will increase as well, though, again, not necessarily on a one-for-one basis.

There is another way of saying all this that you should consider. Everything else being equal, if producers decide to increase the quantity of goods sold, they can do so only by decreasing the price at which they offer their goods.

The Speculator’s Edge,

Albert Peter Pacelli