Economic Supply and Demand - Example

ECONOMIC ANALYSIS INTRODUCTION: The economy is a system that is comprise of production, trade or distribution of the goods and services along with their consumption (Leamer, 2009). This has been done through various agents in the economy that perform their job. The entire system is based on the needs and wants of the consumer and on the supplies of the supplier. This is a two way process and any disturbances in of the way have its repercussions over the other. The below presented paper has the discussed the concepts of demand and supply in the perspective of global economy followed with the impact of decrease in demand of Asian countries over the production and consumption of Europe. CONCEPT OF DEMAND: In order to understand the concept of demand it is of great importance to understand the definition of demand in relation to the economics. Demand is defined as the principle of economics that illustrates the desire of the consumer along with the consumer’s willingness to pay the price of the particular goods or service (Gartner, 2000). Keeping aside all factors that may affect the relation, it is observed and studied that the price of a certain good or service is directly proportional with the increase in demand of that goods or service and vice versa (Froyen, 2009). The concept of demand shows the entire picture of the element of demand in the economics at a much broader level. Demand is seen as a rate by which the consumer wants to purchase a certain product or to avail the services (OSullivan, & Sheffrin, 2003). The theory of economics depicts that there are two factors associated with that, one is the “taste” and the other is “an ability to buy”. The taste is the desire for a product or good and reflects the willingness to buy that at a certain specific price. Here the ability to buy shows that the individual must have some adequate amount of income or wealth to buy the goods at certain price (Williamson, 2008). Below presented is the simple curve of demand that reflects a comprehensive relationship between the quantity of goods at the price at which the consumers are willing to buy in a specific period of time. (Whelan, and Msefer, 1996) Aggregate demand: The aggregate demand is defined as the amount of goods and services in total, demanded in the economy. At broader level it is termed as the real domestic output that will be desired to purchase collectively by the domestic consumers, governments, businesses and foreign buyers at possible prices for each level (Varian, & Repcheck, 2010). CONCEPT OF SUPPLY: The supply is define as the principle of economics that illustrates the availability of the amount of particular good or service in total, to the consumers. The supply is associated with the amount of product or services available at a certain price or across the range of prices (Mankiw, 2009).   The entire concept is better understandable as the ability and willingness of the seller to supply the goods or rendered the services. It has been observed that at higher prices, the buyers are at better position to get the availability of the product. The rationale behind that is the suppliers always want to maintain a certain portion of profits irrespective of the high cost of production they face because of their capacity. In the real market, when the inventory is less than the expected level of inventory, the manufacturers of the products increase the supply of their products along with their prices. This rise in supply at short term level lead to the increase in the manufacturing cost which further increase the prices of the products. Resultantly, this increase in price lead towards the rise in desired production rate. The similar effect happens if the inventory is kept too high. The Classical theory of economics has summed up this process in a curve for simplicity. The supply curve shows the movement of the slope representing the production of each additional unit in relation with the increase in level of difficulty to produce that product and hence to justify it requires higher price. (Whelan, and Msefer, 1996) Aggregate Supply: The aggregate supply is defined as the real domestic out of the economy accessible at a range of different level of prices. It shows the entire supply of goods and services in an economy at generalized price level prevailing in the economy at a given period of time (Hall, & Lieberman, 2012). It is represented by the curve, which is shown above. Generally, it has been observed that there is a positive relationship between the price level and the aggregate supply and that’s mainly the increase in prices shows that the expansion of the production for business in order to meet the increasing aggregate demand in the economy (Nicholson, & Snyder, 2011). CONCEPT OF ELASTICITY: The elasticity is defined as the degree by which the demand and supply curve respond to a change in price (Besanko, & Braeutigam, 2010). The elasticity of the curve varies between the different types of the products. This is because there are certain products that are very essential to the consumers and are among the necessities of life, such products cannot be compromised over the others because of their importance to fulfill the needs of the consumers. Hence, the consumers are willing to buy these products irrespective of the increase in prices (Baumol, & Blinder, 2011). On the other hand the increase in prices of goods or services that are not necessarily in relation to the general consumption will discourage the consumer to buy. This is because there are more options available and the opportunity cost of buying that product is relatively high than others (Chrystal. 2011). Any good or service is measured to be too elastic if there is a sharp fluctuation in the quantity demanded and supplied of the product due to the slight change in the prices (Cowen, & Tabarrok, 2013). The phenomenon can be represented in the form of equation given below. Elasticity = (% change in quantity / %change in price) Effect of Goods Demand of Asia on Europe: As discussed earlier the supply in an economy is directly related with the demand of an economy. This relationship of demand and supply is not just visible in the economies of the countries but also reflect at much bigger level. This happens when the entire relation of demand and supply at global level. With quite some time, it has been observed that there is a decline in overall demand in many regions of the world; this has impacted the manufacturing and growth of many companies. Further, the slowdown of demand in Asian market has impacted the economy of Europe. This impact is immensely seen on the manufacturing sector of the region. In the Asian market, China is considered as the biggest player in terms of both consumption and production. Because of the huge number of Chinese population and the size of its economy, the fluctuation in the exports and imports of the country impact the production and consumption of other big markets. A big example of the situation is seen by the Nestle, who unsettles the investors due to slower growth of the company in Asia. Nestle is a Swiss based multinational company that produces and sells the consumer goods. The company is a market leader and serves a large chunk of the market across the globe. The company has slowed down its expectations in relation with decrease in demand in Asia, the decrease in demand, reflected on the supply of the products and in order to keep the flow the prices of the products has fall. Not just with the Nestle, almost all food companies are facing the problem of decrease in demand of the products in rising markets and decline in the prices of goods (Franklin, and Koltrowitz, 2014). As stated above that China is the biggest player of the global economy and it drives the global growth, and currently China is going though the slowdown in demand. There are several aspects that cause the situation. Among them, the initial one is the decline in labor migration, the country is facing the labor surplus and with the comparatively less job opportunities the consumption of the household sector of China is getting weaker. The standards there are very low as compared to the international standards of household consumption. This decrease in consumption affects the production and sales of the international brands of consumer goods. The companies have a certain objective to grow and raise their sales and for that they have expanded their business to tap the potential of emerging markets. But low level of consumption reflects on the demand of the economy which reflects on the growth of multinational companies. In order to sustain the growth, the companies tend to decrease the prices of their goods in the developed markets so that they can keep hold over their consumers. The slowdown in China has a knock on effect on other Asian countries since represent approximately half of the entire domestic demand of Asia, excluding Japan (Roucher, and Xu, 2014). The rising inflation in the Asian region with a minimal increment in the wages has decreased the consumption capacity of the people. With the perception and practice of saving, it is getting difficult for a large number of individual in Asian countries to spend. The entire slowdown in the emerging markets and a decrease in the demand have impacted the entire economy of the world. Especially it has hindered the growth of trading partners of the company. The slower growth made the commodity prices to fell so that it can sustain in the developed markets. CONCLUSION: With the study of the impact of Asian slowdown on the European countries it is concluded that the elasticity of the long-term imports of Asia and the long-term exports of European countries is based on the domestic demand of the economy. The entire situation has a ripple effect on different principle of economy like supply and demand. The decrease in demand with the normal supply has leaded the producers to reduce prices. In order to cope up with the situation, it is important enhance the collaboration between the economies of developed and emerging markets. Further, it is of great importance that the governments of the developed and developing countries support the entire situation. This can be done by facilitating the structural reforms in the emerging economies in order to boost the productivity and growth (especially the medium term growth). Further, special initiatives must be taken to improve the standard of household sector by addressing their basic issues. References Arnold, R. (2008). Economics. Mason, OH: South-Western Cengage Learning. Baumol, W., & Blinder, A. (2011). Microeconomics: Principles and policy. Cengage Learning. Besanko, D., & Braeutigam, R. (2010). Microeconomics. John Wiley & Sons. Brickley, S., and Zimmerman, J. (2009). Managerial Economics and Organizational Architecture. Boston: McGraw Hill Chrystal, A. (2011). Economics. Oxford University Press. Cowen, T., & Tabarrok, A. 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