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How do markets determine which consumers are more desperate to buy a commodity in a market? Carefully explain your answer with the use of a supply-demand diagram

Economics Dec 09, 2020

How do markets determine which consumers are more desperate to buy a commodity in a market? Carefully explain your answer with the use of a supply-demand diagram.

Expert Solution

Demand curve is a graphical representation of law of demand. The law of demand states that at lower price of a normal good, more quantities of the good will be demanded, other factors affecting the demand remaining constant.

Notice that when price is P1, quantity demanded is Q1 and when price reduces to P*, more quantity is demanded that is Q*. This implies that at price of P1 there were fewer consumers who were demanding the good than the number of consumers who are demanding at price P*. The lesser the price becomes, more and more consumers will be added, demanding the good. From this phenomena it is clear that those who demand at higher price have more willingness and ability to pay than others and thus are more desperate that even at higher price they are demanding. From this it is inferred that suppliers can find the consumers, who are more desperate to buy a commodity at upper level of demand curve. In other words, they are found as those who are ready to buy a commodity even at high price.

Look at the given demand and supply graph as follows:

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