Supply_and_Demand

Supply and Demand & Price Elasticity The economy is shaped by events and policies that consist of the tools of supply and demand in various markets. Supply and demand is described by how prices vary due to the balance between the availability of a product or service at each price and the desirability of the product or service at each price. Supply and demand is what governs the way that economics functions. The activities of buyers and sellers determine how the changes in price and quantity influence market equilibrium. These prices can be determined by factors such as availability of goods, price, substitutes, income, expectations, and taste and preferences (Tomlinson, n.d.). Other considerations in market-based economic systems are competitiveness, monopolies and oligopolies. Supply and demand are the forces in which market economies work. They determine the quantity of each good produced and the price sold. (Mankiw, 2006, p.63) Just like everything in life, supply and demand often change. The change in supply and demand can occur for many different reasons. Changes in demand occur whenever one or more of the determinants of demand change and the demand curve shifts. Changes in consumer preferences will change demand. Consumer preferences can change through advertisement. Every time an individual turns on the television some sort of advertisement for the latest cell phone or the newest fashion trend. Advertisement can be considered a major determinant of the change in demand. A good way to increase demand is to tie a product in with another, more popular product. For instance, when DreamWorks Animation comes out with a new movie, it usually can make a profit from stuffed animals, video games, and action figures from that same movie. Another cause of an increase in demand is consumer income. A drop in consumer income will normally be associated with a decline in demand. A change in supply occurs whenever one or more of the determinants of supply change and the supply curve shifts. Price elasticity is determined by how much of the quantity demand good result in the change of the price of the good being sold. Availability of good substitutes, necessities, luxuries, demands of the market, and the time to use the good for sale play a role on how to measure the changes in price of the good. Elastic goods change drastically in price because of demand for the good while inelastic goods only show a slight change in price due to demand for the good. Necessity goods usually do not change in price as much as a luxury good will change because a luxury good can be set aside while a necessity good is needed to survive. Food, clothes, and shelter are considered necessity goods with inelastic price changes while automobiles, hair and nail salons, and movie tickets are considered luxury goods with elastic changes in price. Substitute goods (which are close to the quality of the product of interest) are cheaper to produce, change the demand for the original good, and cause good`s price to be elastic. The market views elasticity of demand is by consumers choices (substitutions) available under the same category as the good of interest. Clothing is a broad category with many different brands available which the market views as an inelastic good because clothes have no substitute. Blue jeans are considered an elastic good because clothing is narrowed to a specific category and can be substituted with slacks, shorts, or sweatpants. Time between purchases of goods can produce elastic price changes. A person buys a refrigerator and 10 years later the price has changed drastically to purchase a new refrigerator compared to a person buying a second refrigerator a few months later which causes the time between purchases to be elastic. To compute the price elasticity of demand, and economist must divide the percentage change of demand of goods by the percentage change of price. Computing elasticity can be done monthly, seasonally, or longer to determine price and can be affected by the demand curve. If supply is high and demand is low will cause the price to come down and the reverse affect for a high demand and a low supply. These two curves, when graphed together, cause a center gap from which price can be set. As the curves change, so will the price for the good(s). The cost to produce the item will play more of a role on price, but these curves are used to raise or lower the price, accordingly. In market-based economic systems, the economy is driven by consumers and their buying decisions. In competitive markets the price of a service or item changes in response to the supply and demand of that particular service or item. With many buyers and sellers in a market, similar services and items available in that market are present, the market is said to have perfect competition. In perfectly competitive markets relatively small market share, the production firms are price takers, identical or similar products and services are sold, and freedom of entry and exit within the market structure (Mankiw, 2006). At the opposite end of a perfectly competitive market is a monopoly. A monopoly exists when only one supplier is available of a good or service. The three contributory factors to a monopoly include: 1) the sole ownership of a strategic resource; 2) government action through patents, copyrights, and sole license distribution; and 3) natural monopolies, which are created when a single company is able to provide a product or service to an entire market at a lower cost than two or more firms could. Market power is an attribute to monopolies because such firms are able to influence the market price of a particular product or service (Mankiw, 2006). A market structure similar to a monopoly is an oligopoly. An oligopoly is formed when only a few companies that provide a product or service are present. The companies within an oligopoly are mutually dependent on each other because they are producing the same product or service, and are competing for the same market share (Mankiw, 2006). In contrast to a competitive market, both a monopoly and oligopoly have restricted entry into a particular industry. The role of an economist within these market structures is to consider all opportunity costs both implicit and explicit, when evaluating a firm (Mankiw, 2006). In conclusion, the demand of a good dictates the supply of the good. Supply and demand is the popularity of goods subject to the consumer`s preferences. Market equilibrium is a balance between supply and demand of goods, in which supply and demand both equal the product available for sale to the purchases of the good. Price elasticity is determined by the availability of substitutions which cause the change of price. Competitive markets prices change to underbid other businesses selling the same type of product, while a monopoly or an oligopoly price changes rise to cover the cost of rising costs. Consumers should always take into consideration, their demand of a good will undoubtedly be the success or failure of a business.