Supply_and_Demand

Supply and Demand and Price Elasticity Paper Shirley Moore Lucas Mendoza Principles of Economics ECO/212 February 1, 2010 Joseph Zodi Phoenix Online What causes changes in supply and demand' Demand is the action of the consumer and supply is the action of the producers. Consumer’s demands are the motivation to the producers to supply the market with goods. The law of demand states that when all things are equal the demand will decrease when the price increases. The law of supply states that all things are equal the quanity supplied increases when the price increases. There are several contributing factors to the change in supply and demand. The causes have both a negative and a positive effect on the supply and demand. A decrease in the consumer’s income will cause a decrease in the demand of non-essentials. Consumers are less likely to spend money on vacations, new cars and homes. The limited budget will probably be disbursed one food, clothing and rent. An increase in income will result in an increase in demand of products. Price increase of product can result in a decrease of demand. Consumers are less likely to spend the extra money on the product. If the price decreases the demand will increase. Inferior good will decrease the demand for a good. Superior goods at the same price will increase in demand. Close substitutes can also affect the demand of goods. If hamburger go on sale then it is likely there will be an increase in hamburger buns. If the price of hamburger goes up the demand for hamburger buns will decrease. Personal preferences can increase or decrease supply and demand. An individual’s tastes are hard to measure but it does change the supply and demand of goods. If you love watermelon then your demand will increase or if you don’t like watermelon your demand decrease The consumer’s expectation about the future can also increase or decrease the demand for products. If you know you are going to have a cold winter then your demand for firewood will increase and if you are having a warm winter then your demand will decrease. An increase in the number of buyers will increase demand and if there is a decrease them the demand decrease. States that have a larger population will have a greater demand for goods verses a state that has fewer. Supply is affected by the price of the good. The price includes the cost of the input goods, the price of the product, the technology, government and expectations for the future. When the total cost to make the goods falls and the price of the product increase the supply will increase. If the cost of making the goods increases and the price decrease the supply will decrease. When the input cost is decrease then the producer will increase the supply for the consumer. If you are baking bread and the cost of the flour decreases then the total cost of making the bread decrease and the supply will increase. Improvements to technology will increase the supply of goods. If a new oven is made and you can bake 2 more loafs of bread and it decreases the baking time then the efficiency of the baking time is increased then the supply will increase. If technology does not improve and it becomes less productive then the supply decreases. Government taxes all business both at the state level and the federal level. An increase in taxes adds to the cost to produce the good increases and that results in decrease of supply. A decrease in taxes or a form gets a tax break then the cost to product the good decreases and the supply increases. Future expectations in regards to a decrease on price will increase the supply of a good. The firms want to get the best price for their good for as long as possible. If the price is projected to increase then the supply then the supply is decreased. Again the firm wants to get the best possible price for their good. If they limit the supply until the price increases they will sell more at the higher price. The point where the supply curve intersects the demand curve is called the equilibrium. Equilibrium exists when the supply meets the demand. If the supply is greater than the demand it creates an overage. This creates a surplus when this happens the seller decreases the price in order to sell his goods. When the demand increases the price will increase. When there is a greater demand than there is a supply of a good it is called a shortage. When there is a shortage in supply the consumer is willing to pay more for the good so the price increases. When determining how events affect the equilibrium in the market place you have to decide if the event shifts the supply curve, the demand curve or both and if the curves shift to the right or left. The results can be an increase or decrease in both price and supply. An example of market equilibrium is snow skies in the winter they are in high demand people are willing to pay more to enjoy the season. In the summer they are in little demand and the prices reflect the demand with the higher price in the winter and the lower price in the summer. Price elasticity measures how sensitive the demands for the goods or services are to their price. If a good is a strong necessity, like how insulin is to a diabetic, and this person needs the product in order to survive; price will have little effect on demand. Since price has little effect on demand, the price elasticity of the product is weak. The availability of substitute goods (competition) can affect the elasticity. If there are more competitors in the market, you may need to compete on price. However if there's no competition in the market, like if your business is in a monopoly, then you won't need to worry about cheaper substitute goods from competition, and so price would be less important when attracting customers. Good examples of this would be the car industry and the computer industry. The car industry is a market with free entry. As long as you have a product you can enter this market. There are many factors that can determine the price you pay for a car. Luxury is a huge factor when paying for a car. How well was the car put together' Are the seats leather etc. Leather is not one of the necessity items, but it does affect the value of your vehicle. This option is more than likely one of those that changes drastically depending on the location and the economy as well. If people have money to spend on the leather they probably will do so. Another big factor is location. Take for instance. Leather seats in Florida aren’t really practical. It gets hot and humid in the sunshine state. The heat and humidity lead to sticky seats, which quite frank feels gross when leaving. Not only is that it a natural organic material so it holds heat. For the Northern state leather is probably more practical than it is a luxury. The leather is easy to clean. It is very comfortable and handles the outside weather well. Leather holds heat well, which will come in handy during the cold months. Now on the other hand, the computer operating system is close to being a monopoly. Take Windows for instance. There are other options out there, but most are not as effective as Windows. Windows can almost charge consumers an arm and a leg. There aren’t really any competitors in the operation system field. This allows Microsoft the price there productive accordingly on what they feel is appropriate. References N. Gregory Mankiw Principles of Economics Fourth Addition Steven Tomlinson Economic www.tomlison.swlearning.com