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The Law of Supply and Demand as Big Principles of Economics - Term Paper Example

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The paper “The Law of Supply and Demand as Big Principles of Economics” appeals to the pattern that the lower the price of a product or service, the higher the demand for it. However, this law is not relevant for status goods and for low-quality goods, which are influenced by other factors. …
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The Law of Supply and Demand as Big Principles of Economics
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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.
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.
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 the 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 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.   ...Download file to see next pagesRead More
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