Supply and Demand Paper Essay
Introduction, factors that can change supply and demand, substitutes of the product, complements of the product, how necessity impacts on the price elasticity of the product.
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One of the most fundamental basics of micro-economics is the supply and demand of services or products of a given nature. Despite its frequent use, the analysis of the supply and demand of the products in the market provides a very basic understanding of the market nature and what should be done to promote either of the factors when it is down (John, 2001).
In every product that is in the market, one way or another there must be a substitute which is called competitor in the market and a complements which works together with the product, the most typical example of a complement is the ink of a biro pen, if you can buy a biro then you ought to afford the ink for the biro just like the case of a car and fuel, they are complements of each other even though they don’t have a direct relationship. The changes in the prices of one product can have some effects on the prices of its complements.
On the other hand, substitute products have a direct relationship because one can be replaced for the other. This effect is the genesis of the marketing strategies that we witness in the modern world. Increase in marketing strategies has been largely contributed by the increases in the number of the substitute products available in the market.
In essence, the higher the demand of a certain commodity or services, the higher the number of competitors in the market fighting for the commodity or the services by supplying the need to the market (John, 2006). This analysis is going to discuss the demand and the supply of a commodity which is the computer in this case.
Some of the factors that affect the demand and the supply of a computer include the following; the initial factor that can affect the supply of computer to a particular region is the demand of the computer services in the region.
If a region has less demand for computer services, there is going to be less demand for computers in the region. The supply of the computers is also limited by the availability of the substitute products like the PDA and advanced phone handsets that can perfectly perform the task of a computer.
Additionally, the demand of the computers is subject to the availability of services that requires computers, such activities includes the Cyber Café, computer learning center, major offices which computer systems required in a given region among other factors that will demand the services of computers.
In our case, some of the most common substitute of the computer includes; Personal Digital Assistant (PDA) and advanced mobile handsets. These two products are the major replacement or substitutes of the computer. They are the substitutes of the computer because one can use the product instead of opting to buy a computer.
A PDA is a typical example of a computer substitute because it does the functions of the computer with minimal effort and space unlike the computer which occupies space and hence creates inconvenience to the user while travelling. A mobile phone also creates a typical substitute of a computer because of its ability to perform the task of a computer with an added advantage of its size. The two products are the typical examples of the computer substitutes available in the market.
From the basics of microeconomics according to William (2008), a complement of a product is the product that is needed for the primary product to work properly. In essence, some of the most basic complements of a computer are the peripherals such as the printer, joysticks, scanners, the internet connection, and software systems.
There are both hardware and software complements of the computer. Software developers are usually the primary developers of the complements of a computer system. Software’s perform both the primary and the most fundamental role in a computer system; a computer cannot be functional without its software’s installed. Additionally, software’s perform the secondary factor of adding value to the computer system. The value added by the software’s has been the genesis of the ever increasing demand for the computer.
The elasticity in microeconomics as explained by John (2006) is the relative change in the demand with respect to the changes in the pricing of the commodity in question. It is usually expressed in a ratio as follows a typical graph for this ratio is normally given as shown below;
With the increase in the necessity of the product which is a computer in this case and keeping the price constant with other external factors, in an ideal situation, it is expected that the price elasticity of the of the computer will be positive.
In the real world this might not be the case because of the assumptions made; the increase in the necessity will lead to increase in the number of competitors who are substitutes of the product. On the other hand, the increase in the necessity may cause an increase in the price which may result in a constant or not effect on the elasticity of the product.
This paper has succinctly discussed the factors that influence the nature of the demands and the supply of a commodity which is taken to be a computer in this case. The demand of the computer is subject to its substitutes and to some extent its complements, it complements simply adds value to the computer while its substitutes reduces its demand in the market.
The price elasticity of the commodity is subject to the changes in demand as a ratio of the price. The necessity of the product is thus supposed to increase its price elasticity; however this is not always the case because of other influencing factors.
John, B. (2001). Economics: a student’s guide . Chicago, IL: Financial Times Prentice Hall.
John, T. (2006). Principles of Microeconomics . California, CA: Cengage Learning.
William, J., & Alan, S. (2008). Microeconomics: Principles and Policy . New York, NY: Cengage Learning.
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Supply And Demand Conclusion Essay Example
- Pages: 2 (489 words)
- Published: October 12, 2018
- Type: Essay
Supply and demand is one of the most fundamental concepts of economics and it is the backbone of a market economy. A market is a place where buyers and sellers converge to transact goods or services for profit. Demand refers to the quantity of a product or service as desired by buyers, and the quantity demanded is the value of a product that people agree to buy at a certain price.
Supply refers to the availability of goods and services that the market can offer.Competition in the markets determine the forces of demand and supply, while a competitive market is one where products remain the same and the prevalence of a large number of buyers and sellers who have no influence over each other. Let us take a look at a global example of how supply and demand plays in
the rising of oil price. While the demand for oil is rising and is inelastic with respect to price in the short run. Which means that people have become heavily dependent on the consumption of oil for transportation, heating, and production of energy to run factories, etc.
It is therefore neither cheap nor easy to convert to alternative sources of energy since there is an elaborate infrastructure in place to deliver oil based energy around the world. Hence, on the demand side we have the rapid growth in terms of consumption and the difficulty in switching over to alternate sources. On the supply side, we have a cartel that controls a huge portion of the oil supply. This cartel is able to control the supply mechanism in order to cause the increase or decrease in oi
price to suit their own benefit as well as the benefit of other oil producers.They are quite intelligent to make rational decisions based on short and long term needs and strategies. So it is unwise to think that they will do anything else other than to maximize their position.
That does not mean that all they care about is short term profit. They understand that if the price does increase, they will create powerful incentives for research and development, investment in alternative sources, and infrastructure investment needed to deliver alternative sources to the market. Hence, they continue to pump up the volume, just fast enough to discourage serious investments of that type.A third factor that is widely acknowledged, is the speculative element due to the fluctuation in the value of the dollar.
If Americans elect politicians who are going to pay more attention to the budget deficit, and get our financial house back in order, then one can certainly look for the dollar to rebound a bit and the speculators to move on to other opportunities. This would ease the price of oil, maybe as much as $40 a barrel.WORKS CITED<http://www. nytimes.
com/2009/06/12/business/global/12oil. html><http://www. nytimes. com/2009/07/06/business/06oil. html>
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Page One Economics ®
The science of supply and demand.
"A body in motion tends to stay in motion unless acted on by an out-side force."
Science Is Everywhere
We live in a world governed by the laws of science. From gravity, to electromagnetism, to sound waves, our lives are filled with scientific phenomena that structure and affect every facet of our daily routine. As a species, we have attempted at every turn to channel the laws of science to our own benefit, constantly working to build better products and to develop improved means of manufacturing. However, sometimes science unveils itself in unanticipated ways—ways that often force its will on the distribution of goods in markets.
Figure 1 Personal Consumption Expenditures
SOURCE: FRED ® , Federal Reserve Bank of St Louis; https://fred.stlouisfed.org/graph/?g=r60z , accessed January 2021.
Few events demonstrate this fact better than the COVID-19 pandemic of 2020. As this new viral strain spread around the globe, many businesses in the United States closed or reduced workers' hours, sometimes by the choice of businesses—to prevent employees from catching the virus—and sometimes due to government stay-at-home orders. 1 In the early months of the pandemic, virtually no industry or market remained unaffected as the economy declined: Consumer spending on goods and services dropped by 6.7 percent in March and 12.7 percent in April (Figure 1) and the unemployment rate rose from a 50-year low of 3.5 percent in February to a post-Great Depression record of 14.7 percent in April (Figure 2).
Figure 2 Unemployment Rate
SOURCE: FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=r5AM , accessed January 2021.
Supply and Demand
COVID-19 affected markets the same way they are affected by any outside force—through supply and demand . In competitive markets , supply and demand govern the ways that buyers and sellers determine how much of a good or service to trade in reaction to price changes.
The law of demand describes the behavior of buyers in markets: As the price (P) of a good or service rises, the quantity demanded (Q D ) of that good or service falls. Likewise, as the price of a good or service falls, the quantity demanded of that good or service rises. Consider your favorite snack food. A downward sloping demand curve indicates that as the price of the snack increases, you would be able and/or willing to buy a smaller amount. This relationship is demonstrated by the downward sloping demand curve in Figure 3. When the price increases from P 1 to P 2 , the quantity demanded decreases from Q 1 to Q 2 .
Similarly, the law of supply describes the behavior of sellers in markets: As the price of a good or service rises, the quantity supplied of that good or service rises. Likewise, as the price of a good or service falls, the quantity supplied of that good or service falls. Therefore, as the price (as determined by the market) of your favorite snack rises, firms are willing to produce more units. This relationship is demonstrated by the graph of the upward sloping supply curve in Figure 4. When the price increases from P 1 to P 2 , firms are willing to supply a greater quantity. That is, the quantity supplied increases from Q 1 to Q 2 .
Market prices are constantly adjusting to bring into balance the amount desired by buyers and the amount sold by sellers. This balance is found at the equilibrium price , where supply and demand intersect (Figure 5). At this point we have our equilibrium price (P e ) and equilibrium quantity (Q e ).
The COVID-19 pandemic and the associated lockdowns hit the Leisure and Hospitality sector particularly hard (Figure 6). A recent study looked at hours worked by sector in the immediate aftermath of stay-at-home orders—March 2020. 2 As shown in Figure 6, the effects on hours worked are separated into supply factors (red bars) and demand factors (blue bars) and measured as the percent change in historical growth rates of hours worked in each sector. Supply factors are related to businesses partially or fully shutting down. Demand factors are related to reduced consumer spending, such as from customers not shopping, to avoid catching the virus, or simply cutting back on spending due to income loss. 3 For most sectors, hours worked dropped compared with historical trends due to both supply and demand factors.
When a factor other than price affects supply or demand, it is modeled by shifting the supply or demand curve, respectively, rather than moving along the curve. For increases in supply or demand, the curves are shifted to the right to higher quantities. For decreases, the curves are shifted to the left to lower quantities.
Although supply factors contributed to most of the almost 10 percent drop in the Leisure and Hospitality sector in March 2020 compared with historical growth, demand factors also contributed (see Figure 6). The change in this sector is demonstrated in Figure 7: Demand decreases (shifts to the left) and supply decreases more (also shifts to the left), resulting in a lower quantity of goods sold at the new equilibrium (Q 2 ). 4
Meteorology: Hurricane Sandy
In the fall of 2012, Hurricane Sandy hit New York City and surrounding regions, with millions of citizens and thousands of businesses losing power. In New Jersey, only 40 percent of gas stations tracked by AAA had power and were operational in the immediate aftermath of the hurricane. 5 As a result, consumers faced a severe shock to the supply of gasoline.
Applying the laws of supply and demand, one can predict how this event would change the quantity and price of gasoline at the pump: Assuming unchanged demand, 6 the supply curve would shift to the left (Figure 8). The equilibrium quantity would decrease from Q 1 to Q 2 , with the price increasing from P 1 to P 2 .
Did this occur? Not exactly. New Jersey Governor Chris Christie promised to punish gas stations that significantly increased prices above their pre-hurricane levels (P 1 ). 7 As a result, prices remained low because they were not allowed to reach equilibrium, so oil firms had no incentive to bring extra gasoline to the market at the lower price, long lines of vehicles formed, and many stations sold out due to limited supply.
Chemistry: The Ethanol Fuel Boom
In the late 2000s, ethanol experienced a boom as an alternative fuel. Compared with gasoline, ethanol was believed to be cleaner burning (produce less carbon dioxide) and could be produced from renewable crops such as corn and sugar cane. 8 With subsidies provided by the U.S. government to produce fuel ethanol, production facilities sprouted up across the Midwest and supply increased in this growing industry. 9
With more and more ethanol being blended into gasoline for use in everyday car engines, many believed that yearly production would continue to grow for years to come. Then, consumers began noticing that their gas engines were being damaged by gasoline mixtures with large percentages of ethanol. 10 As it turns out, the chemical nature of ethanol makes it very attractive to water. When water gets into an engine's fuel, it increases the corrosion of metal and degrades the engine. As a result, regulators decided that gasoline for normal car engines could only contain up to 10 percent ethanol by volume. 11,12
Using supply and demand to analyze fuel ethanol markets is a little tricky due to the volume ethanol limit. In Figure 9, the desire of producers to increase the supply of ethanol is indicated by the rightward shift of the supply curve. Producers would expect ethanol buyers to continue increasing their demand as ethanol becomes more and more popular. However, all else being equal, once buyers are running their vehicles with gasoline with 10 percent ethanol, their desire to purchase more would dramatically decrease and the demand curve would become a nearly straight vertical line. 13 That is, the quantity demanded wouldn't increase much beyond this limit even if the price of ethanol were to decrease because people won't use gasoline with more than 10 percent ethanol. Thus, no matter how much producers wish to increase supply, buyers would not buy much more ethanol and increased production of ethanol would drive down prices.
Figure 10 U.S. Fuel Ethanol Consumption and Percent of Motor Gasoline Consumption, 1981-2019 (June 24, 2020)
Figure 10 confirms this analysis of supply and demand. Fuel ethanol consumption increased dramatically during the 2000s and then flattened out when it reached about 10 percent of motor gasoline consumption. 14
Markets provide a means by which individuals and businesses can trade goods and services. Though goods and services come in many shapes and sizes, they are all governed by the laws of supply and demand. Of course, unanticipated scientific events, such as pandemics and hurricanes, can alter the course of markets. Yet, the same laws that make markets function every day will exert their will—the laws of supply and demand.
2 Brinca, Pedro; Duarte, Joao B. and Faria-e-Castro, Miguel. "Is the COVID-19 Pandemic a Supply or a Demand Shock?" Federal Reserve Bank of St. Louis Economic Synopses , 2020, No. 31; https://research.stlouisfed.org/publications/economic-synopses/2020/05/20/is-the-covid-19-pandemic-a-supply-or-a-demand-shock .
3 Some sectors such as Wholesale Trade and Information were positively impacted by demand factors. In the case of the Information sector, the increase may have been caused by families increasing their demand for goods and services to work, communicate, and/or enjoy entertainment from home.
4 Figure 7 depicts price increasing, but price could decrease depending on the size of the supply and demand shifts and how responsive supply and demand are to price changes.
5 Smith, Aaron. "Gas Shortage Continues in Areas Hit By Sandy." CNN Business, November 2, 2012; https://money.cnn.com/2012/11/02/news/economy/gas-shortage-sandy/index.html .
6 There could actually have been an increase in demand from individuals using gas powered electric generators during the power outage.
7 Futrelle, David. "Post-Sandy Price Gouging: Economically Sound, Ethically Dubious." Time , November 2, 2012; https://business.time.com/2012/11/02/post-sandy-price-gouging-economically-sound-ethically-dubious/ .
8 U.S. Energy Information Administration. "Biofuels Explained: Ethanol and the Environment." December 7, 2020, update; https://www.eia.gov/energyexplained/biofuels/ethanol-and-the-environment.php .
9 Byrge, Joshua A. and Kliesen, Kevin L. "Ethanol: Economic Gain or Drain?" Federal Reserve Bank of St. Louis Regional Economist , July 1, 2008; https://www.stlouisfed.org/publications/regional-economist/july-2008/ethanol-economic-gain-or-drain .
10 Johnson, M. Alex. "Mechanics See Ethanol Damaging Small Engines." NBC News, August 1, 2008; https://www.nbcnews.com/id/wbna25936782 .
11 Tyner, Wallace E.; Brechbil, Sarah l. and Perkis, David. "Cellulosic Ethanol: Feedstocks, Conversion Technologies, Economics, and Policy Options." Congressional Research Service, October 22, 2010; http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R41460.pdf .
12 Specialty vehicles with anti-corrosive engine parts were sold to accommodate fuel with higher concentrations of ethanol, including E85, a fuel mixture containing 85 percent ethanol. However, such vehicles and fuel types have yet to gain mass popularity.
13 The demand curve would likely not be fully vertical, as decreases in any fuel component's price, like ethanol's, would increase the quantity demanded of fuel. However, because ethanol makes up a small percentage of fuel, the demand curve is assumed to be nearly vertical.
14 U.S. Energy Information Administration (2020). See footnote 8.
© 2021, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
Biology: The study of living organisms.
Chemistry: The branch of science that deals with the identification of the substances of which matter is composed.
Competitive markets: Markets in which there are generally many buyers and many sellers so that each has a negligible impact on market prices.
Demand: The quantity of a good or service that buyers are willing and able to buy at all possible prices during a certain time period.
Equilibrium price: The price at which quantity supplied and quantity demanded are equal. The point at which the supply and demand curves intersect.
Meteorology: The branch of science concerned with the processes and phenomena of the atmosphere, especially as a means of forecasting the weather.
Subsidies: Payments made by the government to support businesses or markets. No goods or services are provided in return for the payments.
Supply: The quantity of a good or service that producers are willing and able to sell at all possible prices during a certain time period.
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