Supply and Demand basics

Profitability of any organization boils down to the basics of supply and demand. If you start with the concepts of microeconomics, which deals with the behaviour of an individual unit, be it a consumer or a firm, it is the supply and demand curves that come into play. Simply put, these form the foundation of the subject.

The Supply curve represents the quantity that a producer is willing to supply at a given price. The Demand Curve represents the quantity that a consumer is willing to buy at a particular price. Intersection of these two curves gives us the equilibrium or the market clearing price.

In the above diagram, S represents the supply curve, D1 and D2 represent the demand curves; P1 and P2 represent the market clearing prices for the demand curves D1 and D2. Movement along a Demand curve represents the change in quantity demanded with change in price, with all other factors remaining the same (ceteris paribus). When a new factor comes into play and the demand increases considerably or we can say, that the quantity demanded at each price increases, there is an outward shift in the demand curve and we move from Demand curve D1 to D2. The market clearing price thus changes from P1 to P2.