Supply_and_Demand_and_Price_Elasticity

Supply and Demand and Price Elasticity Paper In today’s society, individuals constantly interact among one another that inhibit ones behavior whether it is household related or business endured. “The behavior of an economy reflects the behavior of the individuals who make up the economy (Mankiw, 2007). Individuals connected through current trends are influenced in many ways through constant changes in supply and demand as well as the changes in price elasticity. Determining how changes in price and quantity influences the markets’ equilibrium, the fluctuation of the demand and change in curve, and the substitutions that may affect the demand in price elasticity is discussed. Despite diversity within the society, one must analyze the causes associated in the supply and demand monopoly chain. Economists, for example, identify the connections and its characteristics within the marketplace to determine the market price. To better understand the association between supply and demand and its position within the marketplace, economics examines efficiency and the shifts in the supply and demand curves. With greater precision, the necessity of goods possesses its own unique connections that affect an individuals’ needed and wants through supply and demand. Many factors may cause changes in supply and demand such as price of substitute goods, consumer income and prices of compliment items, consumer expectations, government, input technology, and trend. For example, a high gas prices incentives customers to purchase smaller and more fuel efficient cars such as hybrids. Cars with high gas consumption such as hummers, large trucks and SUV, and luxury cars with larger engines become less in demand. The demand curve for large vehicles shifts inward. In contrast, the demand curve for hybrid vehicles and other gas efficient vehicles shifts outward with higher demand. In response to the customers’ demands, in 2008, General Motors announced a major shift away from its production of trucks and SUV’s. It shut down four American plants “in response to a rapid change in consumer behavior tied to rising fuel costs.” With a change in availability for substitute products may shift the supply curve in or out. For example, when pharmaceutical companies create a new drug, they hold the patent on the drug and only the company that holds the patent may create the drug. However, after twenty years, the patent on the active ingredient become no longer valid, and other pharmaceutical companies may produce generic versions of the drug. This introduction of generic drug produces a substitute effect, which shifts the supply curve for the brand name drug inward. The income effect also influences the demand curve to shift in or out. When the oil companies raise the prices of gasoline, the purchasing power of consumer decreases because the income remains stable. Able to afford less with the limited income, the demand for gasoline decrease and shifts the demand curve inward, however, with a decrease in prices of gasoline, the demand curve will shift outward because consumers will be able to afford more gasoline. They will drive more and entertain the idea of higher gas consuming vehicles. Factors that may influence the demand and supply to shift inward or outward vary. Each factor from introduction of new technology that may influence productivity as well as government taxation and subsidy to introduction of substitute goods pay a role in determining the supply and demand curve, which help calculate the market equilibrium to maximize profit. When quantity of a product equals the quantity of product demanded, market or competitive equilibrium is met. For example, when General Motors overproduced large gas consuming vehicles, an excess supply took place. The supply of large vehicles outweighed the consumer demand and the bidding mechanism took over. GM started to lower the prices on its vehicle to attract more consumers in a bidding mechanism. This resulted in a market or competitive equilibrium which the demand and supply falls at a balance. In San Francisco, the number of vehicles in downtown outweighs the number of parking spaces creating an excess demand. This imbalance between the demand and supply drives the cost of leased parking spaces up in a bidding mechanism. Because of the scarcity of parking spaces, the customers compete for the limited number of spaces and drive the cost up. The two parts eventually meet at market equilibrium, in which enough parking spaces become available to consumers, and the bidding mechanism rests, however, when the market demand or supply shifts in or out, the market equilibrium also increases or decreases. For instance, when the ski resorts close for the spring and summer months, the demand for snowboards shift inward as consumers look more toward bicycles and water sports. With excess supply of snowboards, the stores place the items on sale driving the price of the snowboards down along the supply curve. In comparison, around September when the weather starts to cool, the consumers will no longer look toward water sports and begin to favor snowboards. The demand shifts outward creating an excess in demand. This excess in demand will drive the price of the snowboards up along the supply curve. The maximize profit and efficiency, meeting market equilibrium stands critical in a market driven by consumers and suppliers, and all factors need equal consideration. Determined by the necessity and availability for substitute goods, the price elasticity refers to the magnitude of price change that may occur for an item. For an item considered necessary, the elasticity of the price becomes more malleable. Electricity companies like PG&E may raise or lower the prices of their goods with more elasticity because the necessity of electricity and gas in everyday life. In addition, health care is another necessary item with more elasticity. Health care providers and insurance providers raise prices of their services with greater flexibility because everyone needs healthcare. In Devon Herrick’s article, “Why are Health Costs Rising,” the cost of healthcare increased about 2000% from 1947 to 2002 compared to about 600% for other goods and services (Herrick). Even with skyrocketing costs, patients are willing to pay for healthcare even risking high amount of debt and even bankruptcy. With necessary items, the demand will most likely remain stable. In comparison, introduction of more substitute goods reduces price elasticity. Within San Francisco, residents possess higher buyer power with many options for gym memberships from 24hour fitness and Crunch to smaller independently owned neighborhood gyms. With such large amount of substitutes for the same good, the membership prices remain at about $70 to $100 per month. With greater accessibility to substitutes, a slight increase in membership prices incentivizes the customer to make a simple change to a cheaper gym that provides the same good. More broadly, the more general and necessary the item is in common life, the more elastic the price becomes, and with introduction of substitute goods, the elasticity of the price decreases to accommodate. Constantly, the demand and supply shifts to accommodate to various changes. The competitive market continues to drive buyer and sellers to keep demands high. Supply and demand influences a market based upon the events that affect price and quantity. Price and quantity is determined by the consumers’ income and what substitutes, if any, could prominent a consumer from curving his or her decision, also known as the curve. (Mankiw, 2007) Behavior of an individual in the market affects which direction the curve shifts. Other deterrents force buyers and sellers to shift price because of bidding mechanisms that eventually result in market equilibrium. Price elasticity is a demand in which the economy balances daily. The necessity of a good as discussed, is based upon the like kind of that particular product thus leaving the price of the product proportioned at a stated price or the demand is not proportioned and the seller is forced to lower price in turn revenue falls. “The tools of supply and demand can be applied in many different kinds of markets.” (Mankiw, 2007) An individual bases his or her own decision on what intrigues or shapes the consumers’ taste in turn continuing to create a change in the economy. References Herrick, Devon (2003, May 07). Why are Health Costs Rising'. No. 437 Retrieved April 19, 2010, from NCPA website: http://www.ncpa.org/pub/ba437 Mankiw, N.G (2007) Principles of Economics. (4th ed.). Mason, OH: Cengage Learning. Chapter 1. Retrieved April 17, 2010, from University of Phoenix, ECO/212 – University of Phoenix Website Mankiw, N.G (2007) Principles of Economics. (4th ed.). Mason, OH: Cengage Learning. Chapter 4. Retrieved April 17, 2010, from University of Phoenix, ECO/212 – University of Phoenix Website Mankiw, N.G (2007) Principles of Economics. (4th ed.). Mason, OH: Cengage Learning. Chapter 5. Retrieved April 17, 2010, from University of Phoenix, ECO/212 – University of Phoenix Website