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Principles of Micro Economics (Change in Supply and Demand) - Research Paper Example

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I. Supply and Demand The Law of Supply and demand is one the most fundamental concept in economics. Demand meant the number of goods and services that the buyer or market wanted to buy or acquire at a certain price. Supply on the other had is the amount or number of goods and services that the producers are willing to produce at a certain price…
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Principles of Micro Economics (Change in Supply and Demand)
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Principles of Micro Economics (Change in Supply and Demand)

Download file to see previous pages... The law of demand states that there is an inverse relationship between the price of products and services and the quantity demanded in a given period, all other things being equal. In circumstances where the price of a product increases, the market responds by decreasing the demand. In contrast, when the price of a product decreases, it is expected that the market will respond with an increased demand. The market’s sensitivity to price is also known as price elasticity (Nelson 574). Supply on the other hand increases the number of its produced units when the price of goods and service increases. In contrast, supply will decrease when price decreases. It is expected as producers are driven by profit motive and they are motivated to produce more at a higher price to increase their profit and is not motivated to create when there is no incentive for profit. Corollary, producers will only supply goods and services at a price that is higher than their marginal costs (Maurya 2). For illustration, let us use the demand schedule below; Price Quantity Demanded 1 100 2 80 3 60 4 40 5 20 According to the demand schedule, for every $1 price increase, there is a corresponding decrease in demand of 20 units. The quantity demand will continue to slide by 20 units as the price increases by a dollar. Figure 1 shows how the quantity in demand decreases with every dollar increase of price. Figure 2 will illustrate the change in demand. The demand changes because the price also changed. The illustration in figure 2 shifted to the right because there is an increase in demand as more quantity is demanded at each price. Figure 1. Change in quantity demand. Figure 2. Change in demand Supply on the other hand increases as the price increases. It increases because it provides producers an incentive to profit at a higher price. In figure 4, it showed that as demand increases, supply also increases. Conversely, supply will also decrease when demand decreases as illustrated in figure 5. Figure 4. Demand rises Figure 5. Demand falls Supply on the other hand tends to increase as price increase. As figure X will show, the corresponding increase in price is matched with a corresponding increase in supply. So how does the change in demand can affect supply? Demand is elastic and is sensitive to price. Supply on the other hand is motivated to produce more with a higher price. The elasticity of demand or its sensitivity to price affects supply by mitigating its production because higher demand that is a result of lower price does not provide much incentive for producers to supply more (Adler and Dumas 182). This contradicting nature of supply and demand (supply increases when price increases while demand increases only when price decreases) enables the price of a product and services to be established in the market. The price of a product or service is a point where the market is willing to pay certain goods and services at a price where the supplier is also willing to supply which is not at a loss to them (McCall 404-405). This is illustrated in figure 6 where supply and demand met. In the final analysis, demand determines the number of units that will be supplied in the market, thus affecting supply. Figure 6. Price established in the market On occasions that supplier will produce more than what is demanded, say for example in figure 5 where the prevailing market price for a ...Download file to see next pagesRead More
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