Demand & Supply; two very simple words that have been popping up a lot in just about every news or magazine article. Thanks to the current economic doldrums, the words that seemed so simple are actually turning out to be much more than what their literary meanings connote.
SO THE NEXT TIME YOU COME ACROSS 'DEMAND & SUPPLY' (the words); KEEP IN MIND THAT IT'S THE SIMPLE THINGS IN LIFE THAT ARE ACTUALLY THE ONES TO BE CAUTIOUS OF !!
So I have analysed some of the most basic yet essential (for an economy) impacts of the 'Demand - Supply Curve'; that are making up news and leading the world markets into a turbulent phase.
I shall make up my own headlines and try to explain them one by one.
- INFLATION - The most searched word on the net !
So what has the demand supply curve got to do with inflation ?
Well the root cause of inflation lies here itself. Discrepancies in the 'demand supply curve' gives rise to Inflation. How? Let's understand in simple words:
Imagine the DEMAND for goods & services increases; SUPPLY of goods & services on the other hand falls short to pacify the demand.
RESULT : To check the increasing demand; price of goods & services increase bringing the DEMAND SUPPLY CURVE in perspective; resulting in INFLATION.
What if the SUPPLY increases and DEMAND decreases - DEFLATION !!! Decrease in prices ! That has been a dream for just about every common man.
- US DOLLAR VS INDIAN RUPEE : The war not won !
Okay, let me put it this way; the price of $1 has been fluctuating a lot of late, mainly between Rs.43-Rs.50 (past 5 yrs).
Reasons for such fluctuations are countless, but again 'demand - supply' plays a good role here. The USD is the reserve currency of the world - implying that the equity floating in the markets is in the form of USD. Considering the Indian market, more the investment in the market, more will be the amount of USD flowing in; more & more USD means SUPPLY is more, when the DEMAND is still the same.
More SUPPLY, less DEMAND - Value of INR appreciates ( eg. from Rs.45 to Rs.43).
Similarly, when the investment is less or the investors start withdrawing their money, USD volume decreases; implies the SUPPLY decreases which eventually means an increase in DEMAND - And INR depreciates (eg. Rs.45 to Rs.49); which is the current status of INR.
With the commotion in the world market and the news of an oncoming recession, FIIs have decreased, resulting in the INR depreciating in value.
With the commotion in the world market and the news of an oncoming recession, FIIs have decreased, resulting in the INR depreciating in value.
- SHARE MARKET : The commotion that never ends !
Alright ! Recession or no recession; the share market plays its fair share of unpredictable Bull & Bear fight. Now what has the 'demand - supply cycle' got to do here ? Well the idea was presented a few lines above, but now I shall elucidate.
Okay, the world market can never be truly understood. What topples it, or what pacifies it; no clear picture ! But one thing's for sure, even the slightest of rumours can lead to a decline in the share prices.
The current economic scenario has done quite a similar thing.
US & EU Crises; JAPANESE earthquake; investors have never felt such risks in the past decade. Eventually, they have started withdrawing their funds from the share markets, selling them to overcome their fear of losing their money. Also, FIIs have decreased; leading to a decrease in the amount of USD floating in the share market.
Now less money = less share prices = the current situation !
SO THE NEXT TIME YOU COME ACROSS 'DEMAND & SUPPLY' (the words); KEEP IN MIND THAT IT'S THE SIMPLE THINGS IN LIFE THAT ARE ACTUALLY THE ONES TO BE CAUTIOUS OF !!
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