Principles of Demand, Supply and their Elasticities - Assignment Example

Any given market is defined using the group of sellers and purchasers of a specific commodity in that market. In the same line, a competitive market is one that is characterized by numerous purchasers and suppliers, such that each one of these players has a minute influence upon the prevailing price. Demand and supply is the most vital model applied in a competitive market to portray the way sellers and purchasers interact in that market. Purchasers are usually the citizens while sellers are the business firms. The supply of a product is the amount producers are both willing as well as able to take to the market place for the purposes of sale. Demand, on the other hand, is the amount of a product that buyers are both willing and have the ability to buy. In a free market, the law of demand and supply dictate that ceteris paribus; as a product’s price rises, the amount of the product demanded declines and as a product’s price escalates the suppliers offer more of the product for sale. (basiceconomics.info, 2011) Elasticity is the degree of responsiveness of supply or demand to change in price or other factors that influence them. The level of elasticity varies with different commodities because these commodities are faced with different preferences by consumers. (investopedia.com, 2011) 1. Markets of Labor and Capital It is of essence to differentiate labor and capital in the production-front. These two are going to be tackled, but not necessarily in the order that they follow. Firstly, capital is the machinery, equipment, vehicles and others that a firm applies in the services or products it deals in. A capital-intensive procedure is that procedure in a business that calls for more capital investment than labor cost. These procedures that use capital in production are likely to be largely automated and the production is also likely to be in large scale. A capital-intensive production involves expensive equipment since most of this kind of production is most likely associated with a production method called flow production. Capital investments are usually long-term and very costly and the related overheads for their maintenance are very costly. The production scale can be expanded, but also this is highly expensive. Labor-intensive production method, on the contrary, refers to those personnel that are needed to do the operations in a business. Therefore, it goes that labor-intensive procedures in a firm are those procedures that call for more labor as compared to lower levels of capital investment. The procedures can be highly applicable to the production of customized or single products or where production is on a small scale level. Costs associated with labor are; benefits, salaries, wages and training among others. Overtime can also be utilized where capacity needs to be expanded. Suitable staff recruitment enhances long-term growth of an organization. (tutor2u.net, 2011) 2. Factors influencing Demand and Supply and Graphical Illustrations The factors affecting demand start with the price attached to a given commodity. Price determines the law of demand. For example, a rise in price of sugar leads to reduction in quantities demanded. A change in price causes movements along the demand curve as shown by this illustrating figure; Fig 1: Movements along the demand curve Price (USD) P1 P2 movement along the demand curve due to a fall in price D 0 q1 q2 Quantity The other factors influencing demand are with the inclusion of; income- which determines the purchasing power of the individual concerned, price of the commodities related- if a commodity is a substitute, therefore, a fall in price of a substitute would lead to a fall in demand of the commodity in question, preferences and tastes- if a commodity is preferred than another then its demand will rise. A change in other factors affecting demand, other than price, will lead to a change in demand that causes a shift in demand curve. This is shown by this diagram; Fig 2: shifting of a demand curve Price in USD A change in the factors mentioned above, leading to increase in demand, would cause the demand curve to move to the right as shown. D2 D1 0 Quantity Under the supply situation on the other hand, it is obvious as explained earlier in the law of supply that more will be supplied if price of a commodity rises and the vice versa is true. A change in price causes movements along the supply curve. This is illustrated by the diagram below; Fig 4: movement along the supply curve Price in USD S A change in price causes a movement along the supply curve as show p1 p2 0 q2 q1 quantity The other factors affecting supply include; a change in prices of inputs- if input prices rise, supply lowers, change in levels of technology- an improvement in technology leading to a fall in production cost would lead to more goods supplied, government policy- a government policy may restrict production of a given commodity may lower supply, changes in the organization- an organization may decide to increase production and this will definitely lead to a rise in supply among others. Any change in other factors, other than price, causes shifts in the supply curve as shown by this diagram; Fig 4: shifts in supply curve Price in USD S2 S1 A change in any factors, other than price, causing a rise in supply causes the supply curve to shift to the left. 0 Quantity (Salunke and Bagad, 2009 pp5-5, 5-11) 3. Competitive, Complementary and Desired Demand Complementary commodity’s demand varies with a change or a minute change in the main commodity’s demand. This is called the infinite cross elasticity. This is shown in the diagram Fig 5: cross elasticity Price in USD α Infinite cross elasticity 0 Q1 Q2 Quantity It is of great essence to know the impact of a variance in the prices of a complementary and of a competitive commodity upon the demand of one’s commodity as well as the impact of a variance in price of one’s product upon the demand of a competitive as well as complementary commodity so as to fix the right price levels. Studying cross elasticity, thus, is importance since it reflects the relationship of two commodities. The desired demand is that quantity of a product that the buyers need to be supplied with to satisfy their wants. In most cases the level of desired demand equals the level of desired supply. (Kumar and Sharma, 1998 p91) 4. Importance of elasticities of demand to managers of businesses in respect to resources and product markets An inelastic kind of demand means that a unit variance in price leads to a smaller than unit variance in quantity demanded of the commodity. An inelastic demand automatically translates to the managers that a change in price of a commodity upwards is likely to increase profits and therefore, they supply more of the product in question. A resource, if displaying an inelastic supply would mean that the management would purchase more to continue with the increased capacity production. A unit elastic demand, on the other hand, means that a unit variance in price as well as the resultant variance in quantity demanded is the same. Thus, managers would not need to vary the prevailing levels of supply of a product and the resources’ supply that is unit elastic would mean that there is no significant change in the costing of products in that the existing relative cost of resources would increase in line with the quantity of a resource obtained for production. (mcgraw-hill.com, 2011 p107) References: basiceconomics.info. (2011). Supply and Demand. Retrieved 22 May 2011 http://www.basiceconomics.info/supply-and-demand.php investopedia.com. (2011). Economics Basics: Elasticity. Retrieved 22 May 2011 http://www.investopedia.com/university/economics/economics4.asp. Kumar, Arun and Sharma, Rachana. (1998). Managerial Economics. Atlantic Publishers & Dist. p91. mcgraw-hill.com. (2011). Elasticity of Demand. Retrieved 22 May 2011 http://docs.google.com/viewer?a=v&q=cache:LLt5psBuVcgJ:highered.mcgraw- hill.com/sites/dl/free/0070916578/124523/Chapter05.pdf+importance+of+elasticity+to+ managers+in+resource+and+product+markets&hl=en&pid=bl&srcid=ADGEESgG7sr- nY9C89U3ne3Ms6fb0eGzxk97TxWkC7d0jKUIN7WOkxWbA4BHIiC9Pk0PsuY5EJLz K-cKJWV9Gb8ZWsET1lYTiOi-04mcE7tsAXuRQ8NeMjzpvbBtHjNiSfzf- 5q5YKRd&sig=AHIEtbQkIo84gc04Ng-v96ZJCwAzn7YARQ&pli=1 Salunke, Mahendra and Bagad, Anjali. (2009). Humanities And Social Sciences. Technical Publications. pp5-5, 5-11. tutor2u.net. (2011). Labour-intensive or Capital-intensive production? Retrieved 22 May 2011 http://tutor2u.net/business/production/labour-or-capital-intensive.htm Read More