Supply_and_Demand_and_Price_Elasticity

Supply and Demand and Price Elasticity ECO/212 Supply and Demand and Price Elasticity The purpose of this paper is to research supply and demand. The basic concepts team D will examine include: 1. Explaining what causes changes in supply and demand. 2. Determine how a change in price and quantity influence market equilibrium. 3. Describe how the necessity of a good and the availability of a substitution affect price elasticity. 4. Compare and contrast market systems and the role of an economist within these systems. Supply and Demand Supply is defined as the amount of product a producer is willing to provide or sell. Individual supply is the amount of product offered at different prices at a given time by a seller. The components that cause changes in supply are the price of the product, the price of input goods, technology, taxes and subsidies, and expectations about the future market price. 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). 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.            Demand describes a consumer’s desire and willingness to pay a price for a specific good or service. The components that cause changes in demand are competition, price, income, personal taste, substitute goods, complimentary goods, marginal costs, marginal benefits and any associated opportunity cost. The law of demand states that all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa. If the price of movie tickets were to rise 20% the demand for tickets would be lower. The necessity of a good and the availability of substitutions influence price elasticity. Tomlinson (2009) defines elasticity of demand as the percentage change in the quantity demanded that results from a given percentage change in price. The responsiveness of another variable to a change in price defines price elasticity. If the price elasticity is high, buyers are more responsive to price changes. If the price of a product or service increases, consumers will purchase less, and if the price goes down, the consumers will purchase more. Changes in price have little influence on demand if a product or service has low price elasticity. Economists consider the changes in price of substitute goods when dealing with price elasticity. Changes in demand for one good will follow in the same direction when there is change in demand for a substitute good. For instance, if the price of butter rises and all other things held constant, consumers who purchase butter will switch to margarine. If the price of butter decreases, there will be a rightward movement along the demand curve for butter and the demand curve for margarine will shift inward.   Compare and contrast market systems and the role of an economist within these systems. Market systems can be changed or altered based upon supply and demand. Decades ago, it was thought a nation could only increase its wealth if it sold or exported more to other nations. Many nations were poor and didn’t have the capital to be competitive even if the country had an abundance of resources. Also, “market systems were not as involved in trade as in today’s systems” (Allis). These systems can also take competitive advantage by specializing in a product thereby enhancing their market leverage. Living conditions are much better than several decades ago, so households have more purchasing power. Cooperation between nations along with entrepreneurial ability has improved ties in more resources shared as well as increased competition. The economist’s role in the market system is to think in terms of marginal change. Some economist study the supply and demand of people and firms (Microeconomists), while others concentrate on the study of historical trends of the economy and predict forecasts (Macroeconomists). Some analyze market share to report back to their firms, while others monitor legislation and safety trends. Economist looks at the trends of the consumer and the affect of the economy. “Corporations with many international branches or subsidiaries might employ economists to monitor the economic situation or to provide a risk assessment of a country into which the company is considering expanding”. (Dept of Labor). Market system factors and economist continual research of the market go hand in hand. References Allis, R. (2010). How the Market System Works: Economics 101 for Aspiring Entrepreneurs. Retreived May 26, 2010, from http://www.zeromillion.com/econ/how-the-market-system-works.html Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2010-11 Edition, Economists, Retrieved May 24, 2010, from http://stats.bls.gov/oco/ocos055.htmTomlinson, Steve (Year) Economics with Steve Tomlinson Transcript: Defining Elasticity [Episode 4.2-1] Podcast and lecture notes retrieved from http://custom.cengage.com/static_content/OLC/0324833326/data/lecture/8366.pdf