Question: Which Explains The Connection Between The Law Of Demand And Excess Demand?
Answer: (1) Price decreases lead to greater demand and limited supply. Therefore, it occurs when there is excess demand.
In response to your inquiry, you have four different options to choose from.These four options point to an association between demand and excess.Before you can choose an answer, you'll need to determine the correct one.
Although I have offered you the answer, let me explain it so that you have no problem understanding it.
So, in this article, I have explained why the first answer is the correct one. Also, it would help if you knew about excess demand and the Law of demand. For your information, I have also explained those terms in detail with examples.
Connection Between Law Of Demand And Excess Demand
So, Which Explains The Connection Between The Law Of Demand And Excess Demand? The first option is the correct answer. But why? Here is the explanation-
According to the Law of demand, when the price of a good decreases, the demand increases in the process. When the demand for that product is high, it will sell out fast and make the supply limited in the market. Once the supply has limited, demand will increase, creating excess demand for that product. Therefore, the Law of demand can help explain the excess demand for a product.
What Is The Law Of Demand?
In economics, the Law of demand is one of the fundamental concepts. Working with the Law of supply explains how the market economies allocate resources and set the cost of products and services that we observe in day-to-day transactions.
According to the Law of demand, the purchased quantity is inversely proportional to the price. In short, the higher the price, the lower the demand quantity of the product becomes.
The reason behind this is the diminishing marginal unity. The Law of diminishing marginal unity refers to humans fulfilling their most urgent needs using the economic goods they purchase. Afterward, they use the rest of the units to serve the comparatively lower-valued ends.
Law Of Demand Example
For example, let’s say you sell a banana for 1 dollar. But, one day, you decide to lower the price of your bananas by fifty cents. You will likely sell more bananas at a lower price than before. Now that the banana costs half the previous price, more people would love to purchase your bananas.
Now, if you sell the same banana at a higher price, the demand for the bananas will decrease. For example, if you are selling one banana for two dollars, the demand for your bananas will also decrease.
In the same way, the demand for bananas or any other product will remain constant if the price remains unchanged.
Also Read: What Is An Essential Business? Explained With Examples
What Is Excess Demand?
Excess demand is another crucial term in economics. It means that the demand for a certain product is higher than the supply in the market. When the market has less supply of a specific product than the demand, we call it excess demand. Excess demand results in the price rise of the demanded product.
Excess Demand Example
Excess demand occurs when the price of a product is lower than the equilibrium price. For instance, the demand for oximeters has increased in the market. But there is less supply. Therefore, more and more people want to buy oximeters. But due to the lack of supply, there is an excessive demand in the market. This is an excess demand caused by lesser market supply.
If a bakery store offers discounts on a popular dessert, more buyers will want to buy the dessert. Eventually, the store will run out of supply, leaving the customers with more demand. This excess demand occurs due to the price reduction below the equilibrium price.
But, if there is an excessive supply of a good than the market demand, it is called excess supply. Excess demand and excess supply are two opposite phenomena.
Frequently Asked Questions (FAQs)
I hope that you have got your answer; however, for further queries, you can check out the question answers below-
When the price of a good is higher than the equilibrium price, the demand for that product decreases, increasing the supply in effect. On the other hand, if the production of goods is higher than the demand, it can also cause excess supply. Excess demand occurs when the price is lower than the equilibrium price. It can also occur due to the decrease in supply.