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Explain what causes changes in supply and demand

1670 words (7 pages) Essay in Sociology

5/12/16 Sociology Reference this

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The constancy and steadiness of any economy is based on the structure of its supply and demand. The supply and demand establish the pattern of the prices and the quantities of different commodities and products in the economy. The increase and decrease in the supply and demand fluctuates the prices and the quantities of different products. The market has a certain balance between various elements and all this symmetry is affected by the variation in the pattern of supply and demand. Various replacements and substitutions play role in adjusting the balance of the market and the prices and their elasticity are also affected by these. Furthermore all this has an effect on the society.

Basically four market systems are there. Varied roles are played by the economists in different markets.

Explain what causes changes in supply and demand

A market is a place where various products are bought and sold. At times there is too much quantity of a certain good is present in the market then it is said that the supply of that good is high. When a product is produced and the capability and eagerness to sell this product is there at a certain price in a certain time period then this is known as supply of that product.

Similarly when there is a capability and eagerness to buy a certain product at a certain price in a certain period is known as the demand of that product.

The income is traded in return of various jobs and tasks. Likewise if we have a demand of any particular product we offer money in order to buy it.

Market equilibrium is basically where the demand of any product is almost equal to the supply of the product. At this stage the prices for such a product are the most suitable for it. Whereas if there is too much supply and the demand for a product is comparatively low then the consumers will pay less for that product. Similarly if there is too much demand of any product but the market has a less supply of that product then the price of such a product goes high and the buyers are willing to pay even more for it. Therefore in order to maintain the market equilibrium it is better to bring the supply equal to demand and vice versa.

Determine how changes in price and quantity influence market equilibrium

Steven Tomilison defines equilibrium (Understanding Market Equilibrium, Determining A Competitive Equilibrium, p1,) as a state where there is no propensity to change. Market equilibrium is a stage where the prices and quantity of any product remains constant and endure the pressure by the buyers and the sellers. Here the supply of a product is basically similar to the demand of the product. This equilibrium is disturbed when there because of undue pressure a change is brought about in the prices or quantity of any product. What actually happens is that there maybe less demand of a product where the sellers might bring in too much of the product in the market. Here basically there is less willingness to buy a product or the demand of that product is reduced thus affecting the prices and also reducing them. Likewise if there is too much eagerness by the buyers to buy a certain product but the suppliers bring in lesser quantity in the market this will increase the demand thus increasing the prices of that product also. This all is actually bringing a change in the prices and quantity of a product thus affecting the supply and demand and bringing a change in the market equilibrium.

This all can be stated that an increase in quantity decreases the prices whereas the decrease in quantity will increase the prices.

Describe how the necessity of a good and the availability of substitutions impact price elasticity.

Harrison (2004) defined elasticity as the flexibility to increase or decrease. When it comes to the elasticity of the prices this can be shown by a graph of price elasticity of demand or PED. This price elasticity of demand is calculated by dividing both the percentages of demand with the price. This PED is very useful. Companies are interested in them when investing in new business or starting new ventures. It gives them the idea of competitive prices and the profit margin. According to Harrison (2004) the influence or effect of the taxes and subsidies is seen by the governments by this PED. By levying more taxes on harmful products such as cigarettes or alcohol will increase its prices thus decreasing its demand. Similarly by providing a subsidy on any product will decrease the price of that product thus reducing its price and making it easier for the consumers to buy it or increased demand. Nowadays for every product there are different alternatives or substitutions present in the market. The necessity of a product will lead to finding its substitution and creates a direct relationship in them. This relationship fluctuates because of different situations and conditions of the market and the world and this is what capitalism is.

Food has been described as essential and fundamental element for life by the China Agricultural Economic Review. This review describes the relationship between the supply, demand and the prices of different products in Nigeria. The domestic food prices were increased when Nigeria faced a food shortage between 1998 and 2001. To overcome this shortage different food products and livestock was imported from other countries. This increased the prices of these food products as large import bills came along with them which added up to the prices of these products. Automatically these prices were to be endured by the consumers. This resulted in large import bills. Now the domestic food prices were already high because of the shortage the imported food prices were almost similar or even higher then those products. This all brought about the elasticity in the prices and the economy was provided with elasticity. The market would have said to be inelastic if there was no shortage and the food prices were normal and there were less imports and competition higher. http://proquest.umi.com.ezproxy.apollolibrary.com/pqdweb?did=1657972491&sid=3&Fmt=6&clientId=13118&RQT=309&VName=PQD).

Market Systems and the Role of an Economist

There are different types of business and likewise the market systems are also of different types. As per Mankiw (2007) the market systems can be divided into four basic types, and the markets not only in US but all over the world usually fall under one or the other categories. Majority of the economists also agree with this diversification of market systems.

Monopoly is one of the market systems. As the name refers the market is dominated by a single or sole seller and usually no alternatives are present for such a product. Since there are no substitutions the competition factor is also absent. Due to the advancement in the technology and information explosion usually the monopoly of any one product is nowadays not commonly seen but still companies like cable companies, trash collectors etc. are considered to be monopolies due to the uniqueness they provide through their product or services. According to Mankiw (2007) the monopolies enjoy this state because of the low marginal value they keep.

Oligopoly is another type of market system. According to Mankiw (2007) in oligopoly there are very few sellers present in the market for a certain product and action of one at times affects others also. The profits of everyone are affected by one’s decision. This type of competition is known as imperfect competition.

Monopolistic competition is one of the market systems. As per Mankiw (2007) in this type of market system there are sellers who sell products which may be alike but cannot be considered as identical. That is their few features may be similar but they do differ from one another in other features. Again this is a type of imperfect type of market systems where the buyers are same but the products are different.

Perfect competition is the fourth type of market system and as the name indicates that the competition in this type of market system is perfect. The product is absolutely same but there are a number of sellers present in the market. The competition here is too high because of the number of sellers and the price of the product is usually very near to the cost of the product. It is difficult for the sellers to gain a good margin out of such type of a market.

One business can only be successful if it copes up well with the type of market system it enters. Good economists tend to understand the demand of the market system. They are well aware of the cost of the production and make efforts to offer better then its competitors. The buyers are always looking for the best with the most cost effective price. In order to earn the most of the market share one has to cut down its prices to the lowest then only it can compete successfully.

Conclusion

Thus the price of the product, the product itself, its buyers and sellers are the factors that affect the supply and demand of a product. The decision of the buyers regarding the quantity and their purchase is very much dependent on the price of the product. They are always willing to pay for quality but it is essential that it should be affordable for them. The increase in supply is because of too much quantity of a product present in the market, similarly the demand increases when there is not enough of the product present in the market. The price elasticity is also dependent on the importance of a good and the competition present for that good.

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