Supply_&_Demand,_and_Elasticity_Paper

Learning Team Assignment: Supply & Demand and Elasticity Paper ECO/212: Principles of Economics Economic decisions are made every day. Decisions on what type of goods and services we are willing to buy and at what price we are willing to pay. Consumers demand in supply as businesses determine how much supply will be sold, at what cost. To understand the flow of economics, we need to know how supply and demand works along with price elasticity. This paper will discuss what supply and demand is and what causes changes in them, while determining how changes in price and quantity influence market equilibrium. It will also cover how different substitutions impact the price, and compare and contrast different market systems and the role of an economist within each system. Supply and demand are the root concepts of economic analysis since economics is basically concerned with a result and how the result is achieved. The law of supply and demand is “the claim that the price of any good adjusts to bring the quantity supplied and the quantity demand for that good into balance” (Mankiw, p. 77). Many things can change what the supply and demand of a good is. Supply is affected by quantity produced, the price required to achieve a revenue source, the price of the inputs required, along with technology, government taxes and subsidies, and expectations. Producing too much or too little will create a change in the cost of the supply. Producing too much can drive prices down and producing too little can drive prices upwards. Firms require a certain price point to make a profit. If the product in question cannot support the revenue creating price, the product would not be considered profitable or worth producing. Price of inputs can affect the supply. A significant factor of supply is the cost associated with the production of the product. Price of inputs affects the revenue generated by the manufacturer. A firm carefully observes the cost of an input. If the cost of an input increases too high then the supply may decrease as it becomes less profitable. Production may also increase if the manufacturer is able to reduce the cost of inputs, then product becomes more profitable. Technology also has an effect on the supply of a good. Taking advantage of all available technology can cause an increase in supply through efficiencies. Having a variety of new machinery can cut the cost and increase the profit of a product being supplied. Government taxes and subsidies are known to affect supply as well, by organizations being overtaxed or products being manufactured subsidized. Taxes are passed on to the consumers increasing the price, where subsidies can be retained for the sole account of the producer. Consumer expectations can dictate what happens with a supply, if a company decides to increase or decrease the current amount being produced. Preferences in a product can subsequently affect the determination of increasing that supply and decreasing another supply. Demand is affected by the price demanded for the product, price of complementary goods and of substitute goods. Consumer’s income and tastes, preferences, and expectations of the customer affect demand as well. Price plays a big role in the demand of a good. The consumer determines the price they are willing to pay for an item. If there is a more competitive price, then the consumer will choose the alternative. The consumer will decide if an alternative will be appropriate for their need. Income is also a major reason why the demand of a good changes. As income levels rise or fall, consumers will adjust the consumptions or quality of goods being purchased. Tastes, Preferences, and Expectations have an impact on the demand of a good. An example would be, when Coca Cola marketed a clear cola, which tasted identical to the traditional cola. Consumers soundly rejected it and forced Coca Cola to discontinue the clear cola. Changes in price or quantity can influence market equilibrium. When the buyer and supplier come to an agreement on a reasonable price and quantity, market equilibrium is influenced. The change that measures the quantity demand at a price will shift the demand curve to the right and is called an increase in demand. (Mankiw, 2007). If there are changes to price and quantity, it will shift the curve and increase or decrease the demand which will end up changing the equilibrium price elasticity. The equilibrium price elasticity is a measure of the responsiveness for quantity demanded or quantity supplied to one of its determinants. Demand or supply of a good is said to be elastic if the quantity demanded or supplied responds substantially to changes in price. Demand or supply is said to be inelastic if the quantity demanded or supplied responds only slightly to changes in price (Mankiw, 2007). As seen in the law of demands, when the cost of a good or service falls, the demand of good or service increases. The law of demand has two variables which can show an upward and downward trend. The law of demand is also able to measure the responsiveness of the demand to the change of its price. This measurement is called price elasticity of demand. Elastic demand is, “when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.” Hubbard, R. & O’Brien, A. (2010) Price inelasticity is opposite. This is “when then the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.” Hubbard, R. & O’Brien, A. (2010) The necessity of a good and the availability of substitutions impact the elasticity of a product. A good example would be, a price fluctuation on an everyday purchase like coffee for an avid Starbucks coffee drinker in Southern California. If Starbucks raises the cost of a cup of coffee from $1.50 a cup to $5.00 due to a coffee bean shortage in Brazil, since there are so many alternatives or substitutions for Starbucks, like The Coffee Bean or It’s a Grind, the avid coffee drinker is more likely to seek out another company and no longer buy Starbucks. This would mean a cup of coffee at Starbucks is elastic and depending on the statistics one can determine the severity of elasticity. Another example would be the gas price in Southern California. According to GasBuddy.com, gas price has risen from almost $3.00 a gallon to $4.00 in L.A. within months. The American Petroleum Institute (API) claims gas being at $3.00 a gallon and lower the last couple years was due to the US economic situation and the reduction in demand in general. Overall, we know this is not true because the way the U.S. transports goods within the states, via truck, etc the U.S. is married to fossil fuels. The economy would not exist in a situation where gas prices cost so much. This makes gas very inelastic since people still buy gas regardless of price. Market systems include, free market, mixed economic system and command economic system. Free markets can be seen in third world counties where most of the markets consist of bartering, monetary notes, and with other goods or services. U.S. is known as a free market, but there are many cases where companies have to conduct business within the confines of minimal government regulation. This can be seen as mixed economic system, where the government is involved but does not heavily regulate or conduct business. Countries where the government is in complete control of the economy would be Russia and China. Economists study how society distributes resources to help products, goods, and services. They develop deferment ways of gaining information, by surveys and mathematic equations to try and forecast the: who, what, when, where and how of the future economy. They work for any private company or governmental firm but have a specific role. Economic decisions are made by individuals day by day. Supply is affected by quantity produced and demand is affected by the price demanded for the product. Consumers determine whether the prices of a product are reasonable or not. Changes in price or quantity influence market equilibrium, when the buyer and supplier agree what a reasonable price and quantity will be. When the cost of a good or service falls, then the demand of a good or service increases. The necessity of a good and its availability of substitutions will impact price elasticity. When consumers feel a price of a good is too expensive, they will look for alternatives with a competitive price. The economist of market systems study how society or governments distribute resources to assist products, goods, and services. Without supply and demand, and price elasticity, there would be no economy. References American Petroleum Institute. (2011). America's Oil and Natural Gas Industry. Retrieved from http://www.api.org/aboutoilgas/gasoline/upload/Whats_Up_With_Gasoline_Prices.pdf Coupal, D. (2011). Gas Buddy. GasBuddy Organization Inc. Retrieved from http://www.api.org/aboutoilgas/gasoline/upload/Whats_Up_With_Gasoline_Prices.pdf Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall. Mankiw, N. (2007). Principles of Economics. Thompson Learning Inc.