Supply & Demand, and Price Elasticity All things in our society are connected in some way, for example, how humans relate to each other. Complex ideas and analysis are not without their own set of unique connections. The intricate theories of economics are a prime example of this connection. To gain an accurate understanding of how supply and demand are connected, and its role within the market, one must analyze the functions of each as separate entities, and how they relate to economics as a whole.
To begin analysis, one must examine what causes change between supply and demand. Once this has been achieved, investigating how changes in price and quantity influence market equilibrium, and how the necessity of a good and the availability of substitutions impact price elasticity will need to be conducted. The final step will be to compare and contrast market systems and the role of an economist within these systems. In order to discover what causes change in supply and demand, people need to understand the definition, different forms, components, and principles.
Supply is defined as the amount of product a producer is willing to provide or sell, while demand is the amount of product a buyer is willing to receive or buy. There are two forms of supply: individual and market. Individual supply is the amount of product offered at different prices at a given time by a seller. Market supply is the amount of the product in the marketplace. The components of supply are the price of the product, the price of input goods, the state of technology, taxes and subsidies, and expectations about the future market price.
An example of a cause that would change supply is the change in the cost of supplies and resources: if the cost goes up, producers will decrease their supply. The law of supply is the amount of the products offered by the sellers, directly related to prices of all things being equal (ceteris paribus). There are two forms of demand similar to supply: individual and market. Individual demand is the quantity of the product or service that one plans to buy at different prices at a given time. Market demand is the sum of people’s demand in the marketplace.
Just like supply, demand has its own determinants such as the price of the goods, the price of substitute goods, the price of complementary goods, tastes and preferences, a consumer’s income, and expectations about the future. An example of a cause that would affect demand is the change from a higher or lower income. This would cause an increase or decrease in demand. The law of demand is the quantity inversely related to the price, ceteris paribus. Oftentimes in supply and demand, pricing affects every aspect that goes along with it; if pricing stays stable, consumers will be able to purchase equal amounts of products.
A family’s income creates a demand for the amount of products that are used on a weekly basis. When price increases, consumers tend to buy less of a particular good creating a demand curve. Depending on the consumer who notices pricing starting to rise, they will purchase extra goods to help them save money until the price lowers. This frequently affects the way things are sold in our local markets. If a change in demand exists, people will use substitute items because of cost. The use of a substitute item will shift the demand curve and will create a new demand curve with the substitute item taken into account.
Additionally, prices change due to market value which impacts the consumer. Availability of certain goods helps keep prices low which influences market equilibrium because consumers will be able to purchase more goods. When a shortage of goods exists, this also affects the markets equilibrium because as prices go up, purchasing becomes less and the consumer only gets a portion of what they would normally pay for that good at the same price. The necessity of a good for a consumer can be determined by the following variables: price, substitution cost, complimentary goods, income, taste/preferences, and expectations.
Elasticity of demand can be summarized the measure of how responsive consumers are to a change in price. If the price of the good goes up, the consumer will buy less of the good, if the price of the desired good decreases, the consumer will purchase more of that good. This concept applies to all the variables listed above. A change in price in either direction is going to affect the consumer’s decision to acquire the good. A good way to look at all the variables is isolating each variable to determine the effect of each with respect to the elasticity price.
The key to elasticity is that it is a unit-less measure. The exact number of units does not matter; the ratio of the percentage changes in quantity divided by the percentage change in price. Additionally, time and budget percentages are variables of elasticity price. The longer a consumer has to look for an option to buy the good will determine the effect of the result to elasticity price. A product that requires a large percentage of the consumer’s budget will make the good elastic.
The above variables are examples of how necessity of a good can affect the price elasticity of a product. A competitive market is a group of buyers and sellers of a particular good or service which the individual buyer or seller has no impact on the price of the traded good or service. In the market there are two main systems: demand curve and supply curve. The demand curve shows the relationship between the prices of a good or service that consumers are willing and able to purchase in a given period, assuming all other variables stay constant.
The supply curve shows the relationship between the price of a good or service and the quantity of the good that producers are willing and able to supply to the market in a given period, assuming all other variables stay constant. The economist uses models to determine the competitive equilibrium and to define the comparative statics in a market. The economist, in these systems, uses the data to allocate resources in the most efficient way while reducing waste. The supply of goods and services and demand for goods and services are the two forces that make the market economies work.
There are similarities between these two forces — they both show the relationship between the price of the good and the quantity of that good. The future expectation of the market affects both curves. Supply and demand connect when their quantity and their price meet. A competitive equilibrium exists if the quantity demanded by the consumers meets the quantity supplied by the sellers, The competitive equilibrium point is determined by the demand and the supply forces, it is the point from which the market has no incentive to move.
The demand curve is based on the price of the good, the price of complimentary goods, the price of substitute goods, the consumer’s income, the consumer’s taste and preferences, and the future expectations; it is derived from the consumer’s behavior. The supply curve is based on the price of the good, the price of the ingredients to make the good, the technology that is used to make the good, the taxes and subsidies imposed on the good, and the future expectation; it is derived from the seller’s behavior. The economist collects information, analyzes it, and devises theories in an attempt to learn how the world works.
These theories rely heavily on the demand and the supply in a given market. These particular systems determine the competitive equilibrium and define the comparative statics in a market. The competitive equilibrium assist in reducing chaos in the market and in better allocating resources. In conclusion, identifying the concepts behind supply and demand will help one understand its role in economics. Additionally, this knowledge will assist in shaping the habits and decisions consumers are faced with on a daily basis. Having examined the factors listed above, one will have a more astute understanding of the connectedness of supply and demand.