Demand and Supply - Assignment Example

Demand and Supply Abstract Demand and supply are two intricately interlinked concepts which relate to a commodity. They are described as market forces because they are the basis upon which the price of a commodity is decided. Thus, price is usually determined at a point where demand equals to supply, otherwise known as equilibrium point. This paper analyses the meaning of demand and supply. Various concepts regarding demand and supply, such as determinants of demand and supply as well as elasticity of demand and supply are also analyzed in this paper. Finally, the paper discusses the application of demand and supply concepts to the Singapore motor vehicle market. Introduction Demand and supply delineates an economic model of determining prices in the market. In this regards, the price of a commodity in a competitive market will vary until it reaches a point where the quantity demanded is equals to the quantity supplied (Sowell 34). This is a point commonly referred to as the equilibrium point of price and quantity. There are four basic laws of demand and supply. The first one states that when demand is increased while supply is kept constant, it results to higher equilibrium price and higher quantity. Secondly, when demand decrease while supply is kept constant, it results to lower equilibrium price and lower quality. Thirdly, when supply increases and demand remains constant, it results to lower equilibrium price and lower quantity. Finally, when supply decreases and demand remains constant, it results to higher equilibrium price and lower quantity. Demand Demand for a product refers to the amount that buyers are willing and able to buy (Pindyck , and Rubinfeld 51). On the other hand, quantity demanded is the demand at a particular price. The law of demand states that as the prices of a commodity increases, the quantity demanded will fall, other factors held constant. Other than price, there are other factors which influence demand. The first factor is income. In this regards, an increase in income results to an increase in demand. Thus, as incomes increases, people are able to purchase more. This occurs when the commodity is a normal good (Harpreet). On the contrary, if the demand for a given commodity decreases when income increases, such a commodity is referred to as an inferior good. Another factor which influences demand is price of other relater goods. These refer to both substitutes and complements. Substitutes are goods which can be used as alternatives whereas complements are goods which are used in conjunction with each other. The third factor affecting demand is the tastes and preferences of consumers. A change in consumers’ tastes and preferences may affect demand to large extents. The other factor influencing demand is the consumer’s expectations of future changes in prices. Thus, when the consumers anticipate the price of a given commodity to escalate in the near future, they tend to increase the demand for that commodity. Also, the number of potential consumers affects the demand for a given commodity. Elasticity of demand refers to the measure of percentage change in the quantity demanded as a result of changes in demand determinants (Mankiw 21-23). In this regards, price elasticity of demand refers to the percentage change in the quantity demanded as a result of percentage change in price. It is usually negative and expressed as an absolute value. This implies that if the elasticity is greater than one, then the demand is deemed to be elastic. On the other hand, if the elasticity is between zero and one, demand is said to be inelastic. However, if the elasticity is equals to one, then the elasticity is said to be unit-elastic. Secondly, Income elasticity of demand refers to the measure of percentage change in demand as a result of a percentage change in income. Conversely, cross elasticity of demand refers to the measure of percentage change in the demand for a given commodity as a result of a percentage change in the price of another commodity (Marshall 118). This refers to commodities which are complements, substitutes, or those which do not relate at all. Supply Supply of commodity refers to the amount producers are willing and able to bring to the markets for sale (Pindyck , and Rubinfeld 72-73). Quality supplied on the other hand, refers to the amount offered for sale at a particular price. The law of supply states that as the prices of commodities rise, the supply of a product increases, other factors kept constant. The major determinant of supply is the cost of production. These include input prices, technology and expectations. Input prices incorporate prices of inputs such as labor, raw materials and capitals. Therefore, as the prices of these inputs increases, production becomes less lucrative, hence, production decreases. Consequently, decreased production leads to decreased supply ("How supply and demand,”). On the other hand, technology refers to the methods used to transform inputs into outputs. Improved technology leads to a reduction in the costs of production, making sales more profitable. This therefore leads to increased supply. With regards to expectation, if firms expect a rise in prices in the near future, they may tend to produce less mow, and produce more later on. Other determinants of supply are prices of related goods as well as the number of suppliers. Elasticity of supply refers to the measure of the change in the quantity supplied as in response to changes in price (McConnel, Brue and Flynn 91). Thus, price elasticity of supply refers to the measure of the amount of goods firms are willing to supply in response to changes in price. In this regards, if the price elasticity of supply is zero, then it implies that the good supplied is inelastic and that the quantity supplied is fixed. Conversely, elasticity of scale refers to the measure of percentage change in output as a result of percentage change in output. In this regards, a process is deemed to exhibit constant returns to scale when the percentage change of inputs results to an equal percentage change in outputs. On the other hand, a process is deemed to exhibit increasing returns to scale if the percentage changes in inputs results to a greater percentage change in output (Krugman 56). Singapore automotive industry Singapore has emerged into a leading commercial hub and a center of several industries in Southern Asia. The most prominent industry in Singapore is the automotive industry. As such, Singapore provides the latest technology in automotive industry. Most of the world’s biggest automobile companies greatly depend on the automotive industry of Singapore (Jackman). Increased demand for automotive parts from companies in Singapore has seen the automotive industry record tremendous growths. In this regards, most global companies especially in Europe and America, heavily depend on the high quality automotive parts which are produced in Singapore. In order to meet this increased demand, automotive companies in Singapore have had to escalate their quantity supply by stepping up their quantity produced. With the sophisticated technology embraced by the automotive industries in Singapore, they find it cheaper and profitable to produce more and more automotive product. Thus, the supply for these products has drastically increased. The kind of automotive parts produced in Singapore include: music systems, leather seats, metal and plastic parts for vehicle interiors, door lock systems, wipers, panels to control temperature among many others (Jackman). Thus, from the foregoing discussion, it can be concluded that demand and supply are important determinants of the price of a commodity. The price occurs at a point where demand and supply are at equilibrium. On the other hand, elasticity of demand is the measure of percentage change in the quantity demanded or quantity supplied in response to changes in price. The concepts of demand and supply are applicable in Singapore’s motor industry whereby an increase in the demand for motor vehicle products produced in Singapore has led to an increase in the supply of these products. Works Cited Harpreet, D. (n.d.). What is demand and supply. Retrieved from http://www.trivology.com/articles/460/what-is-demand-and-supply.html How supply and demand determine commodities market prices. (n.d.). Retrieved from http://futures.tradingcharts.com/learning/supply_and_demand.html Jackaman, Linda. "Automotive Industry in Singapore.”. 2011. Web. 9 Apr 2012. . Krugman, Paul. Microeconomics.Worth Publishers: New York, 2009. Print Mankiw, Gregory. N..Principles of Microeconomics. Boston: South-Western College Pub,2008. Print. Marshall, Alfred.. Principles of Economics. Nabu Press:Columbia,2010.Print. McConnell, Campbell., Brue, Stanley., and Flynn, Sean. Economics. (18 ed.). New York: McGraw-Hill/Irwin,2010 Print Sowell, Thomas. Basic economics : A Common Sense Guide to the Economy. Basic Books: New York, 2010. Print. Pindyck , Robert., and Rubinfeld, Daniel. Microeconomics. New Jersey: Prentice Hall, 2008.Print. Read More