How Market Forces Affect Prices of Commodities - Essay Example

Micro-Economics Introduction Microeconomics is a field of study in economics that deals with the study of individuals and firms and how they make their decisions regarding the allocations of the scarce resources. The study focuses on the behavior of the market where goods and services are sold and bought as well as how prices are determined. It also examines the manner with which the decisions made affect the supply and demand of goods and services. This essay will discuss one of the most significant topics in micro-finance which is market forces. The major market forces to be discussed will be demand and supply, how they affect the market behavior and prices of goods and services. How Market Forces Affect Prices of Commodities Demand The demand of goods and services in the market can be defined as the total goods that people are willing and able to buy at a given price and at a given time (OConnor, Pg. 135). There could be goods and services in the market which the customers are not willing to buy or cannot afford. Such goods and services do not constitute demand. Quantity demanded on the other hand is the exact quantity of goods that are demanded at a given price. The price of the commodities influences demand (i.e.) will influence the quantity demanded. For instance, if the price of goods increases, some people might not be able to afford the commodity and as a result, the quantity demanded will decrease. Similarly, if the price decreases, some people who were not able to afford the commodity previously will now be able to afford and hence the demand will decrease (Krugman & Wells, Pp. 70). There is a law of demand which states; all other factors being held constant, an increase in price of a commodity leads to a decrease in demand. Other than price, there are a number of factors which affect the demand of a commodity. Some of them are; population, taste and preferences, nature of the goods, personal disposable income, price of substitutes as well as customer expectations among others. When the population is high, there will be more people in the market who are available to buy the goods and services. As a result, the demand will increase with an increase in population. A decrease in population on the other hand will decrease the demand. Taste and preference influence demand in that when the people have a great desire of a commodity, they are likely to buy more of it (OConnor, Pg. 137). Desire is a term that may refer to the willingness to buy. It should be noted that one may be willing to buy but they are not able to buy. This does not constitute demand. However, when people are willing to buy, there are higher chances that the demand will go up. Nature of goods is also a major factor that affects demand. For instance, there are goods that people cannot leave without. These are the basic needs. Their demand will relatively be higher. Other commodities that people can leave without (luxuries) have a lower demand. Their demand may however rise with an increase in disposable income. This is also a factor in its own that affects demand. When people have more money they tend to buy more. Finally, when substitutes have a lower price, the demand of the commodity in question goes down (Krugman & Wells, Pp. 78). Demand influences the price of a commodity. When the demand increases, there will be more people struggling to buy the few available goods. In a bid to reduce the number of people willing and able to buy the commodities so that the market can be able to satisfy demand, sellers will increase the prices. This will discourage some people from buying. They will be willing to buy but they may not afford to pay the high prices. For instance, when Samsung produces a new phone, the demand is initially very high. For the company to be able to satisfy the market, it normally hikes the prices but will later lower them when the demand is relatively low. Demand of a commodity is a major factor that influences prices. At the end the prices will have a major influence on the performance of the economy. This is because the rate at which people buy goods will dictate productivity and hence the economic performance. If more goods are being bought, the producers can have the motivation to produce more and hence the economic activity will be high. Supply Supply refers to the amount of goods and services that the producers and willing and able to bring to the market and sell at a given price (Komesar, Pg. 5). Goods available in the market are normally brought in by the producers. Producers will always bring goods to the market when the prices for such commodities are able to cover the production cost plus the desired profit margin. At prices lower then the desired, the producers may be able to supply the goods but could not be willing to supply at the prices available. The law of supply states that; with all other factors kept constant, an increase in the prices of goods and services will lead to a proportionate increase in supply. When prices increase, suppliers will be able to make more profits (Krugman & Wells, Pp. 56). As a result, they will be motivated to bring more goods and services to the market so that they can make more money. Just like demand, there are a number of factors that affect the supply of commodities. Price is the major factor as it has been discussed above. Other factors include; cost of production, sellers’ expectations, price of inputs, government policies and price of related goods among others. When the cost of production is high, producers will not be able to produce more goods and hence the supply will below (Komesar, Pg. 6). On the other hand, if the cost of production is low, producers are able to produce more and hence the supply will be high. Sellers’ expectation also influence the quantity supplied to the market. If they expect that the demand will increase drastically in the future, they will increase production and this will lead to an increase in supply. Prices of inputs such as raw materials, land and labor will influence the level of production and hence the supply. When the prices of inputs are high, the production will be low and so will be the supply. Government policies may take the form environmental regulations as taxes and subsidies. When production tax is high, the level of production is low (Krugman & Wells, Pp. 59). The government may give subsidies to certain production in order to encourage mass production. The level of supply of a product will influence the prices. For instance, when the supply is high there will be more goods available in the market with less people to buy those goods. The sellers will tend to entice people to buy the goods in order to get lid of the surplus supply. To do this, the prices will be decreased (Krugman & Wells, Pp. 57). This will motivate people to buy more units of the commodity. In addition, those who could initially not afford the goods will be in a position to afford. Supply therefore acts as a major force that influences prices in the market. Conclusion The price of a commodity is an important factor in micro- economics. It influences the performance of the economy in big way. When prices are high producers will be motivated to produce more. This will create job opportunities and will also increase the economic activity. The market forces have a way of working together to bring the market to equilibrium such that there will be enough supply that is sufficient to satisfy the market demand. Reference List Komesar, Neil K. Laws Limits: The Rule of Law, and the Supply and Demand of Rights. Cambridge [Eng.: Cambridge University Press, 2001. Print. Krugman, P. R., & Wells, R, (2005) Microeconomics, New York, NY: Worth. OConnor, David E. The Basics of Economics. Westport, Conn: Greenwood Press, 2004. Print. Read More