The Law of Demand and Simply - Essay Example

DEMAND The law of demand simply s that any change (increase or decrease) in the price of a commodity will lead to a change (increase or decrease) in the quantity demanded of that commodity, while other factors remaining the same. Any change in quantity purchased by consumers due to a change in ‘other factors’ refers to a change in ‘demand’ causing a movement along the demand curve. Whereas any change is quantity purchased by consumers in response to a change in price is called a change in ‘quantity demanded’ for the product, causing a shift to demand curve. These factors have been pointed out and discussed by several authors (Stiglitz and Walsh (2002), Pindyck and Rubinfeld (2004), Mansfield (1992), Reynolds (1988), Colander, (2004) etc.). Stiglitz and Walsh (2002) demarcate these factors into economic and non-economic factors. Below is an elaboration of these ‘other factors’. Economic Factors The following three factors have been referred to as economic factors (Stiglitz and Walsh, 2002) influencing the demand for a product, holding price of the commodity constant. Changes In Income Of Consumers An increase or decrease in the income of consumers may lead to a rise or fall in the demand for a product. This change by and large depends upon the nature of the commodity; i.e., inferior good or normal good. In case of an inferior good, an increase in the income of consumer will lead to a fall in the demand of that particular commodity and vice versa, because consumer will then shift to a product much better than the previous commodity in his/her perception. On the contrary, in case of a normal good, an increase in the income of the consumer will cause the demand for that commodity to rise shifting the demand curve to the right and vice versa. Changes In The Prices Of Substitutes This is another economic factor responsible for bringing about a shift in the demand curve. A change in demand of a particular product can be effectuated by a change in price of its close substitutes. The demand for a product will rise if the price of its substitute commodities increases, shifting the demand curve to the right and vice versa. For instance, the demand for coffee for some people will increase as the price of tea rises and vice versa. On the other hand, more tea-consumers would shift to coffee if the price of coffee declines in the market, because a rational consumer will mostly opt for a cheaper substitute, once the price of any of the product rises. Changes In The Prices Of Complements Complements are the products that are used or preferably used with another product. Any change in the price of complements will also lead to a change in the demand for the product. For instance if the price of milk increases, the demand for tea or coffee will also fall down, causing a leftward shift to the demand curve. It is because the consumers will be inclined to consume more of a commodity if the price of a complement declines and the contrary will happen if the complement’s price rises. Non-Economic Factors The following are the non-economic factors that are responsible to effectuate a shift in demand curve (rightwards or leftwards). Changes In Tastes, Fashion And Preferences Changes in tastes, fashion and preferences of consumers concerning some products are also likely to affect its demand in the market. A consumer will stop or start purchasing more of a commodity if his/her taste changes. The same is the case with fashion and preferences. If a particular product becomes in vogue, the consumers are likely to purchase more of the product and if, on the contrary a product becomes outdated, the consumers will purchase less or nothing of it. For instance, if a consumer’s interest shifts from tea to coffee, the demand for tea will shift to the left (decline). Similarly, if skirts become in vogue rather than trousers, the demand for skirts will shift to the right. Hence, any change in consumers’ taste, fashion and preferences is likely to cause a great shift in the demand for a particular product. Changes In Population Any significant change in the size and composition of population will lead to an increase or decrease in the demand for commodities. If the size of population suddenly expands, the demand for most of the products such as food, shelter and clothing will shift to the right. The opposite will happen if the size of population contracts. The composition of population should also remain constant, if the law of demand is to hold good. If the number of babies in the population rises, the demand curve for baby-specific products also shifts to the right, for instance baby food, baby clothing, cots, baby accessories etc. An increase in young population will cause the demand for youthful entertainment, fast food, music, and fashionable clothing to rise. An increase in female population will effectuate the demand for cosmetics, ladies dresses and accessories to increase and so on. Changes In Anticipation Anticipation and expectation also shift the demand curve to the right or left. If the consumers expect the price of a commodity to rise in future, they will start purchasing more of the commodity presently, causing the demand curve of that particular product to shift to the right, and vice versa. This is because the consumers are driven by the motivation to be able to save money that they would be losing if they purchase the product at the expected future price. Demand for some products also increases/decreases if the consumers expect their incomes to rise/fall in the future. Changes In Availability Of Credit A change in the availability of credit to consumers, particularly in the case of superior goods cause the demand curve of these commodities to shift upward. For instance, the demand for cars is likely to rise even if price remains constant, in the case if more car financing or borrowing means are easily available to consumers. SUPPLY The law of supply reflects a direct relationship with price i.e., as price increases, supply also increases and vice versa, holding other factors constant. Any change in quantity offered for sale in the market by the suppliers due to a change in price is referred to as a change in ‘quantity supplied’, whereas any change in quantity offered for sale by the suppliers caused by other factors rather than price is called a change in ‘supply’. An increase or decrease in quantity-supplied causes a movement along the supply curve, and an increase or decrease in supply leads to a shift (right or left) in supply curve. These factors causing a right or left shift to the supply curve is also known as the ‘other determinants of supply’, These ‘other determinants’ have also been put forwarded and examined by several authors (Stiglitz and Walsh (2002), Pindyck and Rubinfeld (2004), Mansfield (1992), Reynolds (1988), Colander, (2004) etc.), which are discussed below. Changes In Prices Of Inputs A change in the price of inputs, such as wages and machines, keeping the price of product constant can also lead to a rightward or leftward shift to the supply curve. If the price of input increases, the cost of production will fall down and the opportunity for more profit will increase, driving the suppliers to produce more. Thus the supply curve will shift to the right. On the other hand, if the price of input decreases, the cost of production rises and thus the chances for more profit will decrease, driving the suppliers to produce less. In this way the supply of a product in the market will fall down causing a leftward shift to the supply curve. Advancement In Technology Advancement in the technology to produce certain product will lead to a change in the supply of a product, while price of the product remains the same. Advancement in technology to produce a product causes the cost of production to fall down and thus, the suppliers would be willing to produce more to the market. Hence, the supply of a product will increase in the market, causing the supply curve to shift rightward. Changes In Anticipation Anticipations of suppliers concerning the product’s sale in future also cause the supply curve to shift. For instance, if the suppliers believe that the price of a certain product will rise in future, they will be induced to sell less in the present and if they expect the price to fall in future, they will try to sell more and thus the supply curve shifts. Changes In The Number Of Suppliers Any changes in the number of suppliers in the market also lead to an increase or decrease in the supply of a product. As the number of suppliers of a product increase in the market, the supply will increase and the supply curve will shift rightward and as the number of suppliers decreases, less will be produced and thus the supply curve shifts leftward. Changes In Taxes And Subsidies Government can also play a role in increasing or decreasing the supply of a product in the market. In case of more taxes levied to a product, the cost of production increases and thus the supply of the product will decrease in the market. In case of subsidies granted to the production of a product, the cost of production will go down and thus the supply of a production will increase. Reference List Stiglitz J.E. and Walsh C.E. (2002). Principles of Microeconomics. 3rd ed. W.W. Norton & Co.: New York Pindyck, R.S. and Rubinfeld D.L. (2004). Microeconomics. 6th ed., NJ: Prentice Hall Mansfield, E. (1992). Principles of microeconomics. 7th ed. New York: Norton Reynolds, L.G. (1988). Microeconomics: analysis and policy. 6th ed.. Homewood, Ill.: Irwin Colander, D.C. (2004). Microeconomics. 5th ed. Boston: McGraw-Hill Irwin Read More