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SUPPLY AND DEMAND

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SUPPLY AND DEMAND

Price is the balancing point of supply and demand. In order to estimate the future price of any product or explain its historic patterns, it will be necessary to relate the factors of supply and demand and then adjust for inflation, technological improvement, and other indicators common to econometric analysis. The following sections briefly describe these factors.

Demand The demand for a product declines as price increases. The rate of decline is always dependent on the need for the product and its available substitutes at different price levels. In Figure , D represents normal demand for a product over some fixed period. As prices rise, demand declines fairly rapidly. D′ represents increased demand, resulting in higher prices at all levels. Figure  represents the actual demand relationship for potatoes from 1929 to 1939. Although this example is the same as the theoretical relationship in Figure , in most cases the demand relationship is not a straight line. Produ…