Supply and Demand - Essay Example

Outline The following essay discusses supply and demand. By the end of this essay one should be able to examine the following. The fundamental concepts in supply and demand. The laws of supply and demand. The economic equilibrium. The factors affecting supply and demand The movements and shifts in the demand and supply curves. The elasticity of demand and supply. Supply and Demand Supply and demand concepts are fundamental in economics. Microeconomics explains the basic models of supply and demand. In this study one gains the terminologies used in economics. Markets consists of firms or individuals that are ready to supply a product and consumers that are ready to purchase the product. Every good or service has its own supply and demand. Demand refers to the desired quantity of a product or service for consumers. Quantity demanded is the amount of product that consumers are willing and able to buy at a given price. The relationship between price and how much a good or product is desired in the market is termed as the demand relationship. Supply presents the quantity the market can deliver to its consumers. Quantity supplied is the amount of product that suppliers are willing and able to sell at a given price. The relationship between price and the quantity of product or service the producers can allocate is termed as the supply relationship. The relationship in supply and demand are influenced by the allocation of resources. The forces of supply and demand will efficiently allocate resources in the most effective way possible. The law of demand states that when the product of a good is high, the lesser the people demanding that good, all factors remaining equal (ceteris peribus). In other words, the higher the price, the lower the quantity demanded. This relationship demonstrates a downward slope (Benson &James, 2008). The relationship is inverse as a decrease of one element results in an increase in the other element. This is because as the price of a good rises so does the opportunity cost of purchasing that product. Therefore, consumers will avoid buying highly priced goods since it might forego the consumption of a product they value more. Unlike the law of demand, the law of supply is an upward slope thus the relationship is direct where a decrease concurs with a decrease. The law states, as the price of a product increase so does the supply, all factors remaining constant (ceteris peribus). This because producers have the goal of profit maximization and therefore they will supply their goods at a price that accrues the highest revenue. Producers that are not in business will try to enter the market so that they can also enjoy the supernormal profits. Suppliers must quickly react to demand and price dynamics and thus it is essential to discern whether the change is permanent or temporary. This guides the suppliers in making long and short-term goals (Murdick, 2011) In the market, this two relationships of supply and demand have to coincide to give a price. This price equates what the buyers are willing and able to buy and what the sellers are willing and able to sell. The market is said to be in equilibrium having achieved the equilibrium price. In this sense, the market is said to have allocated its goods and resources most efficiently. At that given price, producers can deliver all the goods supplied and buyers can buy all the goods they demand. Hence, both the consumers and buyers are satisfied with the market condition. This ideal is however not reached in reality, it is only applicable in theory. This is because there is constant demand and supply and hence the prices are always changing. The contrary is referred to disequilibrium. This is when the price is not equal to quantity. This occurs when there is excess supply or excess demand. Excess supply applies when prices increases resulting in more goods being produced as there is incentive (Haueisein & James, 2008). When this happens, the eventuality is allocative inefficiency. As a result the suppliers will have to reduce the price to the point which buyers can buy all goods produced thus bringing the price back to its equilibrium. On the other hand, excess demand occurs when prices reduce so much that many consumers accumulate demanding the good that the producers are incapable of supplying to the market. Allocative inefficiency also results. In this event, the price will be pushed up, fuelling the suppliers to produce more and thus bring the price at its equilibrium (Murdick, 2011). Having discussed the laws of demand and supply, it is necessary to know the factors influencing price change in both. Demand is affected by elements such as price of the product, economic factors which entail the income of consumers, availability and prices of related products and substitutes, change in seasons and social factors such as market trends and fashion dynamics. Changes in income of consumers affect price in that when their incomes increase, they have a more disposable income to use on consumption. Future expectations that price will reduce in the future will reduce current quantity demanded to take advantage of the anticipated price reduction. Future expectations of further price increases will have the positive effect (Benson & David). Supply on the other hand is affected by price of the product where the relationship is positive. Another factor is the price of related goods or services. Availability of the product in the market affects supply in that if the quantity of good or service is in abundance the price will tend to be less. Supply changes as a result of change in weather conditions is prominent in perishable goods more so in agricultural produce where weather changes are crucial. If weather conditions favor the production of a good then more of it will be produced and thus the surplus will push prices down when less is produced prices rise. Other factors are price of inputs which affect the cost of production, number of suppliers in the market, future expectations in price increase which will reduce current supply and technology of production where the price of the good rises as the technology advancements increase. In both demand and supply, government interventions can influence the quantity demanded or supplied. Government interventions like imposing taxes, giving subsidies, zoning laws, land use and environmental regulations and health regulations. All these interventions influence prices of goods and services and thus affect supply and demand (Haussein & James, 2008) These different factors causes a shift or a movement of the supply and demand curves. A movement is the change along the curve in the price and quantity. A movement occurs when there is a change in the quantity demanded or supplied due to a change in the price of the product. For instance when the price of a good rises the demand decreases, this is a movement in the demand curve. A movement along the demand or supply curve is either up or down the curve, where quantity change caused by a price increase is a movement upwards and quantity changed by a price decrease is movement downwards (Murdick, 2011) A shift in the demand and supply occurs when a quantity of a product demanded or supplied changes in spite of having no change in price. A shift of demand and supply curves is caused by factors other than price. For instance, when the weather suddenly changes to be rainy, more people will buy umbrellas. This will reflect a shift in the demand curve. A shift of the curves can either be on the right or the left, where a decrease in quantity demanded is a caused by a shift to the left and an increase in quantity demanded is caused by a shift to the right. Finally, in discussing supply and demand, we have the elasticity of demand and supply. Elasticity of demand examines the sensitivity of demand to price changes while elasticity of supply examines the degree of sensitivity of a product’s supply to price changes (Benson & David, 2009). Demand elasticity is essential as it helps businesses determine potential changes in quantity demanded due to the price changes of the good and the possible revenues that follow. Thereafter, the firm can make decisions on whether to lower the price of the good, increase it or make no change (Murdick, 2011). Supply elasticity on the other end also helps firms determine the quantity of goods they will produce when certain price changes occur. When elasticity is more than one, the demand or supply is said to be elastic. When the elasticity is less than one, the demand or supply is said to be inelastic. When the elasticity is zero, the demand or supply is said to be unitary elastic. In conclusion demand and supply are the building blocks of economics and the knowledge of these concepts help in understanding economic terminologies and relationships. Works cited Berenson, Mark L, and David M. Levine. Basic economic concepts: Concepts and Applications. Upper Saddle River, N.J: Prentice-Hall, 2009. Print. Haueisen, William D, and James L. Camp. Microeconomics Englewood Cliffs, N.J: Prentice- Hall, 2008. Print. Murdick, Robert G. the microeconomic environment: demand and supply. Scranton, Pa: International Textbook Co, 2011. Print. Read More