Relationship between demand and price
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Published: Mon, 5 Dec 2016
When the commodity price changes, the manufacturers adjust production takes time. As in the short term, manufacturers of production equipment can not change (increase or decrease), if the manufacturer according to the prices of goods in a timely manner to increase production or lower prices based products to reduce production time, there are varying degrees of difficulty, that is, the elasticity of supply relatively small. But in the long run, the expansion of production scale and reduce, or even changing products are met, that supply can adequately respond to price changes, that is also relatively large supply elasticity.
2, scale of production and ease of scale changes
In general, the production of large-scale capital-intensive business, and specialized equipment due to design factors, more difficult changes in their production scale, adjust the length of time, so little flexibility in the supply of its products. Conversely, labor-intensive small enterprises, their products relatively larger supply elasticity.
Price elasticity includes price elasticity of demand cross-price elasticity of demand and supply price elasticity, in addition to income elasticity of demand.
The relationship between demand and price is a major issue of supply and demand theory. In general, other things being equal conditions, an increase in commodity prices, reduced demand for the goods, the other hand, commodity prices, the increased demand for the commodity. The demand for this commodity and the relationship between changes in commodity prices into reverse the law or the law of demand as demand is making for the price one must follow the rules. Commodity demand and prices to measure the relationship with the price elasticity of demand PED, is the demand response to price changes in the extent that a decline in commodity prices or increased by 1 o’clock, caused by increased demand for the goods or reduce the percentage. In general, goods PED> 1 shows that price changes in response to strong demand for such goods as luxury goods (or luxury); PED <1 show that the demand response to price changes in relaxation, such goods for the necessities of life.
The relationship between supply and price of supply and demand theory is a major problem. In general, other things being equal conditions, a commodity price increase, the increased supply of goods, the other hand, commodity prices, reducing the supply of goods. This commodity supply and price changes into the same relationship to the law or the law of supply as the supply, the price is for one decision-making rules must be followed. Measure the supply of goods and the price of such a relationship with a supply price elasticity of PES, is the supply response to relative price changes in the extent that some commodity prices rise or fall by 1 o’clock, the supply of goods to increase or decrease percentage. In general, goods PES> 1 show that the supply response to price changes in the strong, these goods are mostly labor-intensive or easy to keep merchandise; PES <1 show that the supply response to price changes in the slow, these companies more for the money or technology-intensive and difficult to keep goods.
Therefore, when the value of our products, which produce goods for socially necessary labor time to develop commodity prices, or the cost of goods according to production to develop commodity prices, commodity prices should also be investigated on the impact of demand and supply issues Analysis of different commodities and the supply price elasticity of demand price elasticity of PED PES, to determine the types of goods belonging to, targeted to develop a more reasonable price, the price of a more accurate decision-making. Otherwise, although the cost is set to produce goods prices, but commodity price elasticity of demand and supply elasticity is different from all the demand and supply of goods have different effects caused by different conditions and extent of the losses.
In addition, the demand for goods is also affected by consumer income, prices of related products.
Demand for consumer goods measured by the level of income with the income elasticity of demand affect the YED, refers to changes in demand response relative income level, that is, increase or decrease in consumer income caused by the 1% increase or decrease in demand for goods percentage. Generally speaking, commodities YED> 1 show that the demand response to income changes in a greater degree of such goods as luxury goods; YED <1 shows that the demand response to income changes in a lesser degree, this commodities as necessities; YED <0 show that the demand be reduced with the increase in income, such as inferior goods products.
Measure of demand for goods related to commodity prices affect the situation by using the cross-price elasticity XED, refers to two related commodities, the relative demand for a commodity to another commodity price response to the extent that commodity prices decline or the rate of increase in A points of time, causing demand for commodities B the percentage increase or decrease. goods XED> 0 show that the B A commodity demand and commodity prices into changes in the same direction, as another alternative; XED <0 shows that demand for commodities B and A change in commodity prices into the opposite direction, known as complementary products; XED = 0 indicates that other conditions remaining unchanged, B A commodity demand and changes in commodity prices has nothing to do. Therefore, when making pricing decisions, but also examine the income elasticity of demand for goods and cross-price elasticity, to analyze consumer real income and expected income, related to changes in commodity prices affect demand for goods, develop a more reasonable price, or timely price adjustments, to obtain as many benefits and access to the greatest possible profit.
THE PRICE OF OTHER GOODS: the supply for one good is based on the prices paid for other goods that use the same resources for production. If an increase in the price of a substitute good, it will induces sellers to alter purchase of the good which means sellers will sell more of this good instead of the substitute good. If the price of the complement good increases, sellers will supply more of this good as the supply of complement good increases.
CHANGE IN TECHNOLOGY: the available production techniques can make the ability of supply a good more strong. If other things remain unchanged, average costs of production will fall. Developments in technology can reduce costs of production and increase productivity. It makes sell more of a good to be possible.
RESOURCE PRICES: the costs paid for the labor, material and capital affect the ability to supply a good. If the costs of these reduce, then production cost is lower and sellers will supply more of the good for sale.
Price ceiling and price floor are government or group imposed limit on how the price changed for a product. Price ceiling is Government to restrict certain commodity prices too high, and the product may require less than the equilibrium price of maximum price to protect consumer interests of the highest order. In the limit price, part of the market demands were not met, often appears to some form of black market. Price ceiling below the free-market price has some effects. Sellers find they can not get what they expected price, so some sellers will drop out of the market. It will result of reduction of supply. At same time, buyers find they can buy more of this product, so demand increases. Finally, demand exceeds supply, which causes a shortage. Price floor above the market equilibrium price also has some effects. buyers find they need to pay a higher price for the product, so they reduce the purchase or do not buy it at all. At same time, sellers find they can charge more by higher price than before, so they produce more production. The result is that an excess supply in the market. So government needs to do something to remove the resource allocation.
To distinguish between commodity prices and other factors on demand of goods, micro-economics and demand changes in proposed changes in demand for two different concepts.
Change in quantity demand is means that only the price changes caused change in quantity demand. For demand curve, the curve always negative, if the price of the good increases, it will result of decrease in quantity demand.
For example: the price of the pizza increases now, for the demand curve of pizza ,the point in the curve will move upward, so the quantity demand of pizza will decease than before.
Change in demand means that one or more of the factors which determine demand (except the price of the product) changed. It means that the curve will shift not move in the curve itself. The determinants which change demand includes substitute goods complementary goods, households’ income, expectation, and weather condition and so on. If the price of substitute goods increases, the complementary goods decreases, the household’ income increases or buyers believe the price of the good will fall in the future, all of that will make a decrease in demand of the good. So the demand curve of the good will shift to the left.
For example: if the pizza and Pepsi are complementary goods, there is an increase in price of Pepsi. It makes the demand of Pepsi decrease, meanwhile the demand of the pizza will decrease, too. For the demand curve of pizza, the whole curve will shift to the left.
Income elasticity of demand is concerned that the relationship between changes in income and changes in demand. The formula of it is that income elasticity of demand equals to the ratio of the percentage change in quantity demanded of the good divide by the percentage change in income. YED indicates the responsiveness of demand to changes in household incomes.
First degree: Income inelastic (0<YED<1). If the quantity demand rises by a smaller percentage than the rise in income, that means the good is a normal good. Such as food, shoes and clothes
Second degree: Income elastic (YED>1). If the quantity demand rises by a larger percentage than the rise in income, that means the good is a luxury good. Such as brand clothes and bag, sport car and expensive watch.
Third degree: YED is negative (YED<0). Demand decrease when income increases. So the good of this degree is inferior. Such as second-hand goods, cheap goods and food have no nutrition.
Consumer surplus is also known as consumers of profit, refers to the buyer’s willingness to pay less than the buyer of the amount actually paid. Consumer surplus measures the buyer himself feel the extra benefits. It means that the buyers and sellers were all looking forward to get benefit from the market.
Consumer surplus can show by the below diagram, PO represents the price of a good, QO represents the quantity of a good, PQ represents the demand of the good. -ACQ1O represents the good’s value to the consumer, -OP1CQ1 represents the amount consumer pay producer. So the consumer surplus is equal to -ACQ1O minus -OP1CQ1,
From it, we can know if the price of good rise, consumer surplus will drop, otherwise, if the price of good fall, consumer surplus will rise. The other hand, if the demand curve is flat, then the consumer surplus is equal to zero.
Value to the
Amount Consumer pays producer
Producer surplus is a measure of producer welfare. It is different between the price they actually receive and what producers are willing to supply a good .The level of producer surplus is shown by the surplus curve.
Producer surplus can show by the above diagram, PO represents the price of a good, QO represents the quantity of a good, PQ represents the demand of the good. -P1CQ1O represents the amount consumer pays producer, -BCQ1O represents the variable cost to producer. So the producer surplus is equal to -P1CQ1O minus -BCQ1O,
In economics, production-possibility frontier (PPF) shows the efficient productivity of two goods during a period of time using the limited quantity of productive resources or other factors. It shows replace the specified quantity of one good that can get maximum amount of another good, given the society’s technology and the amount of factors of production availableã€‚
Quantity of good B
Quantity of good A
Production possibility curve
For a company, they can produce 600 units of good A and 200 units of good B in a time period. If they want to produce 400 units of good B now, they just can produce 400 units of good A using the remaining resources, that means all the point the company choose must on the curve (like point B), they can not produce 400 units of good B both with producing 600 units of good A (like point A which is outside of the curve). For economic, it means the limitedness of resources.
All the method of production which the point is on the curve they can choose by themselves. For example, good A has a larger demand than good B in the market, so the company may choose the method of production which the point is near the point N on the curve. In contrast, the point near the point M they may choose. In economic, it means the selectivity of resources.
If productive resources are limited, so increasing of production A must come with decreasing of production B, because the resources need to transfer from A to B. Points along the curve describe the trade-off between the goods. The sacrifice in the production of the second good is called the opportunity cost (because if you want to produce more production A, then you will lose the opportunity to produce original amount of production B. Opportunity cost is measured in the number of units of the second good that are forgone if an additional unit of the first good is made. (Like point C which is inside of the curve)
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