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An about the supply and demand - Essay Example

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Supply and Demand Introduction Supply and demand are two of the most important and fundamental principles of economics. Supply is the terminology that defines the quantity of goods and services that producers and manufacturers are willing to avail to the market…
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An about the supply and demand

Download file to see previous pages... In order to maximize profit, suppliers have to sell their goods and services at high prices but this has to consider the purchasing power of the intended market. This paper is a critical evaluation of supply and demand as principles of economics. Concepts of Supply and Demand The Law of Demand The law of demand states that the higher the price of a commodity, the lower the quantity demanded cateris paribus, while the lower the prices the higher the demand (Fisher 36). Cateris paribus in this case implies that all other factors that influence demand are held at a constant. These are for example weather, taste and preferences, income among others. This is due to the fact that the law of demand is basically dependent on two variables i.e. quantity demanded and price. The following diagram is a demand curve, which is a graphical depiction of the law of demand. Fig 1 From the diagram, it can be noted that the quantity demanded was highest, (Q3), at the lowest price, P1, while it was lowest at price P3, which was highest. However, it is important to note that not all goods abide by the law of demand. These are for example giffen goods and products that act as status symbols. Giffen goods are defined as inferior commodities whose demand goes up with rising prices while the vice versa is also true (Baye 42). Inferior, in this context, does not necessarily imply that the goods are of poor quality. For example, if the staple food in a family is rice, products such as meat may be perceived as superior. If the price of rice goes up, it would be normal to find people buying more rice and less of meat and when the prices go down, more meat is bought in comparison to rice. The two goods are not substitutes and in this case, it is assumed that the consumer can afford both items therefore eliminating opportunity cost. On the other hand, status symbols are goods whose value creates a perceivable higher social standing in the society (Gorman 29). For example, if the price of a Mercedes Benz makes it unaffordable for the common market as opposed to that of a Toyota sedan, then, any person owning a Mercedes would be perceived as having an economic advantage over the owner of a sedan. It therefore goes without saying that a reduction in the price of a Mercedes would make it lose its value as a status symbol and that would definitely make it lose its demand to other more expensive and luxurious vehicles. On the other hand, an increase in its price would increase its value as a status symbol thus increasing its demand thereby defying the law of demand. Movements along a Demand Curve versus Shifts in Demand Curve A movement along a demand curve is dependent on one variable only which is price. From the diagram below, DD1and DD2 represents the demand for a commodity, with prices plotted on the Y axis while quantity demanded on the X axis. DD1 will be used to illustrate movement along a demand curve while DD2 illustrates a shift in a demand curve. Fig. 2 On the DD1 curve, it is notable that when the price was at p1, the quantity demanded was highest at Q3. However, after the prices increased to p2 and p3, the quantity demanded moved to the lower side i.e. from Q3 to Q2 and Q1 respectively. However, the demand curve shifted entirely to the right as a result of an increase in income. Notice that prices p1 to p3 remained static but still, the quantity ...Download file to see next pagesRead More
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