Demand, Supply, and Market Equilibrium - Example

Name: Professor: Institution: Course: Date: Demand is referred to as the desire of a customer, or a group of customer to buy a certain good or service at a particular price. According to (Case & Fair 1994 p 21), demand is the quality of a good or service which is purchased at a specific price within a given period of time. There are several factors that influence demand which include price and availability of substitutes, income of customers, taste and preferences, customer expectations, size of the population, income distribution, government policies, and sociological factors. Price is one of the main factors that influence demand. The relationship between price and the quantity demanded of a product is summarised in a table which is referred as demand schedule. The information in the demand schedule can be represented in form of a graph. The graphic representation of the demand schedule is known as the demand curve (Steven & Sheffrin 2003). It is important to distinguish between a movement along a demand curve and a shift in the demand curve. A movement along a demand curve indicates that a different quantity of a product is demanded because the price of the commodity has changed. Thus, when the price of the product falls, the quantity demanded of that product increase, and when the price rises, the quantity demanded decreases. These change in the quantity demanded of a product due to change in prices are referred to as extension and contractions of demand (Case & Fair 1994 p 21). An extension of demand refers to an increase in quality demanded while a contraction refers to a decrease in quantity demanded. An extension in demand is caused by a movement of price to a lower position on the same demand curve. On the other hand, a contraction in demand is caused by a movement of price to a higher position on the same demand curve. This is referred to as a movement along a demand curve. In both causes the demand curve remains the same. Let as use the demand curve in the figure below to illustrate a movement along a demand curve. Source: Nyam J & Mege H (2004 p6) In relation to Extension of demand, let us start by assuming that the original price and quantity of the commodity is represented by point b on demand curve DD. The quantity demanded is therefore q0 at price p0. When prices falls from p0 to p1 the quantity demanded rises from q0 to q4. The new prices and quantity is represented by point d on demand curve DD. Customer’s ability to pay for the commodity has therefore not changed. The increase is caused by consumers replacing the relatively expensive product that they have been buying with the commodity whose price has gone down. The increase in quantity demanded fro q0 to q4 causes a downward movement along demand curve DD from point b to d. Using the same diagram we can explain the contraction of demand. When the price rises from p1 to p2, the quantity demanded fall from q4 to q3. This means that consumers buy more of other goods and less of the commodity whose price has risen and as result, the quantity demand moves from q4 to q3. This causes an upward movement from point d to c on demand curve DD. Note that the only factor that has changed is the price of the commodity. All other factors such as income, taste, price of substitutes and preferences remain the same. The movement is therefore an indication of an increase or a decrease in the quantity demanded due to a change in the price of a commodity. In the long term, other factors such as test, incomes, price of substitutes, consumers’ expectations and even the size of the population may change and this will also change the entire market (Net MBA 2010). This means that the demand curve either shifts to the left if there is a decrease in total demand, or it shift to the right if there is an increase in total demand. This change will not affect a single point on the demand curve but the entire demand curve (Nyam J & Mege H (2004 p6). To illustrate such a scenario, we are going to use the market demand curve for fish shown in the figure below. First, let as assume that the income of the consumers have generally increase which will enable customers to buy more fish at each price. The total quantity of fish bought at any given price will therefore increase. The same case applies when tastes change in favour of fish. The consumer will buy more fish than before at each price which increases demand for fish. The entire demand curve for fish therefore shifts to the right fro DD to D1D1 as shown in the figure below. Let us now assume that the incomes of the consumers have fallen or their tastes have changed in favour of other types of meat other than fish. The ability or willingness of the consumer to buy fish will therefore decline. This means that less fish is bought. This change in the demand for fish will cause the demand curve to shift downwards to the left from DD to D2D2. A shift of the demand curve to the left means that there is a decrease in the demand for a product, each given price as show by the figure below. Source: Nyam J & Mege H (2004 p7) Change in customer income will shift the demand curve to either right or left. An increase in consumers’ income shifts the demand curve to the right. Since a customer’s demand for goods and services is confined by income, higher income allows the customer to buy more products. On the other hand, decrease in income shafts the demand curve to the left. A temporary decline in economic activates and will result to more people becoming unemployed, the demand for goods and services will decline fusing the demand curve to shift to the left (Binger, B & Hoffman 2008). Also, population change can shift the demand curve where an increase in population shifts the demand curve to the right. For instance, imagine a college city bookstore where most of the students return home for the summer. While the students are away, the demand for books shift to the left and when the return, demand for books increase but in both case the prices are unchanged. Another example is where most of the communities are experiencing urban sprawl to an extent that boundaries are pushed wider due to the development of new houses. The demand for gasoline will increase in the urban centers due to the increase in population and on the other hand, gasoline demand will decrease falls in areas with decline population(Nyam J & Mege H (2004 p5). Consumer preference can shift the demand curve, an increase in preference for a particular good or service will make the demand curve for that to shift to the right (Krugmanet al 2009). For example, during the Christmas season new toy attracts the fancy of kids, and their parents compete to buy the toy before it is sold out and this will shift the demand curve to the right. It the prices of related goods changes, the demand curve for the original goods may change as well. These relate goods can either by substitutes or complement where substitute are good that can be used in place of one another. The demand for the original goods shifts to the right if the prices of substitutes increases. if the price of coca cola drinks goes up, the demand curve for Pepsi shifts to the right. On the other hand, the demand curve for the original goods shifts to the left if the price of substitutes decreases. Given that fish and chicken are substitutes and if the prices of chicken fall, the demand curve for fish shifts to the left. Compliments are those goods that are consumed together. French fries and hamburgers are complements (Nyam J & Mege H (2004 p5). The demand curve will move to the left if the price of a complement increases while on the other hand, the demand curve for the original goods will shift to the right if the price of complement decreases In conclusion, movement along a demand curve affects individual price-quantity combination point along the same demand curve. Movement is caused by price changes and quantity bought, but the total demand remains constant hence the DD curve remains the same. On the other hand, a shift in a demand curve involves the translocation of the entire demand curve either to the right or to the right. This shift in demand curve is influenced by test, incomes, price of substitutes, consumers’ expectations and even the size of the population. References Binger, B & Hoffman, E 2008, A change in relative price changes Microeconomics with Calculus, 2nd ed. Addison-Wesley Case, K.E., Fair, R.C.1994, 'Demand, Supply, and Market Equilibrium', Chapter 4 in Principles of Economics, 3rd ed., Prentice Hall Englewood Cliffs, New Jersey Krugman, Paul, &Wells, Robin 2009, Microeconomics Worth Publishers New York.2005 Net MBA 2010, Demand Curve retrieved on 29th march 2011 from http://www.netmba.com/econ/micro/demand/curve/ Nyam J & Mege H 2004, Certificate Business Studies, 1st Edition, Oxford University press: UK. Steven M. Sheffrin 2003, Economics: Principles in action, Hall pp. 81–82. ISBN 0-13-063085-3 http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4 Read More