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Economic Theory

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Economic Theory

A theory of economics is a collection of concepts and principles that explain how various

economies work. Economists may apply different ideas for multiple goals depending on their

specific job. An economic theory I identify with is the supply and demand theory. The concept of

supply and demand is a fundamental pillar of microeconomics and offers a framework for

understanding how prices are determined. As per this theory, the unit cost of a service or a

product may shift until it stretches to a point of economic stability, which occurs when the

quantity at which a customer demands a good is equivalent to the amount at which a customer

supplies it (Inoua & Smith, 2020). Alternatively stated, this point may occur when the price of

the good or service stabilizes. For instance, the price of an item or service may skyrocket if the

supply of that commodity or service continues to drop, but customer demand for it remains; in

this scenario, the demand is higher than the supply.

For example, when a new type of designer jeans is launched, they become very desirable

at the forefront of fashion. All individuals covet these jeans. The designer orders additional

jeans, but just a few are available for sale. Due to their strong demand, the designer could set a

very high price for the jeans. One year later, though, circumstances altered. People get bored

with jeans, and they are no longer fashionable. Demand decreases for designer jeans. The only

way the designer could sell the jeans would be at a discount.

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Reference

Inoua, S. M., & Smith, V. L. (2020). The classical theory of supply and demand.