Laws of Supply and Demand Essay Example | Topics and Well Written Essays - 1000 words

Laws of Supply and Demand - Essay Example In pricing a product, it would seem simple enough to calculate the costs and add a profit margin. However, "While costs form the basis for pricing decisions, they are only a starting point, with market conditions and other factors usually determining the most profitable price" (Gale, Cengage Learning, 2007, p.262). The laws of supply and demand and their associated curves are the instruments that economists employ to determine a price that will maximize profit. An important factor that impacts the law of supply and demand is that the law is reactive to the market. As was illustrated in the Atlantis apartments, raising prices would increase the revenue, but at some level, the demand would drop. Likewise, if the prices rose and suppliers built more apartments the supply would reach saturation and there would be a surplus of units. The demand and supply would react to the market forces, rather than dictating the price. This reaction to the market is the search for equilibrium, which is the point that demand equals the supply. In a perfectly competitive free market, all the units at Atlantis would find renters that are willing to pay the maximum price that the owners could ask. Raising the price and people would move out while lowering the price would still result in the desired occupancy but at a lower revenue. The change in supply and demand differs from the shift in supply and demand. A change in demand may come about as a result of the change in price, where a lower price raises demand. However, increasing the potential customer base would shift the demand. More customers would mean more people would be willing to pay higher rent. Likewise, if an alternative product were introduced, such as the short-term lease, it would shift the supply curve. When the supply or demand curves shift, the equilibrium point changes with it. According to Colander (2007), "The firm plays the same role in the theory of supply that the individual does in the theory of demand.