Supply and Demand

Abstract

The economic elements of supply and demand have been analyzed separately. The factors affecting of supply and demand along with the effects the have on the respective curves have also been considered. Finally, a combined aspect of both has been looked at to understand the macroeconomic equilibrium. The criticisms against this model have been analyzed at the end of the work.

Key words: supply, demand

Supply

The supply, in economics, is the amount of goods manufacturers are agreeable to and capable of selling at a specified cost in the market with all factors held constant. It is usually represented as a curve with the relationship of the amount of product to price showing the supply of a particular product in the market (Blanchard, 67). This supply function can only be derived from a perfectly competitive market structure and does not apply for other structure because there does not exist a personal association between price and quantity. Many factors influence the seller’s ability or willingness to sell a product at the current circumstances, which shift the supply curve. The following are the five major factors (Blanchard, 68):

Price of inputs: the price of any one the factors of production has an effect on the supply of the final product. Increases in the cost of one of the factors may push up the cost of production of the product; hence, the supply goes down. The inverse is true. Some of the factors that may have an adverse effect on the cost of production include electricity. If there was an occurrence of cost of electricity goes up, the production of goods will increase, affecting the supply of the product by increasing the cost of production.
Prices of related goods or services: a related good is any involved in the manufacture of the final product. In the manufacturing of soap, palm oil is a related good because it is one of the main ingredients. The fluctuation of the prices of palm oil would affect the price of soap, which consequently affects the supply of soap, as the producers are not willing to produce it at high production costs. Another instance of related goods is that of leather products. The demand of one type of product may decrease the supply of another.
State of technology: any advancement in the technology utilized in the manufacture of goods will increase supply because increase in efficiency usually lowers the long-term production costs making the product more attractive to the producers. Technology means any process involved in the conversion of a raw material to the final product. This alters the supply curve to the right.
Expectations: the expectations of the seller concerning the future of the market affect the supply of a commodity. The seller’s expectations of the fluctuation of demand for his goods will result in an increase or decrease in production in anticipation of the future. This usually has the exact result of the expectation since demand of the product is interfered with by changing supply. This sort of predictive manipulation of supply is witnessed in the petroleum industry where producers manipulate supply in the market by predicting the alterations in the availability of crude oil.
Number of suppliers: the more suppliers in the market of a certain product, the more the supply of the commodity. This drives down the price of the product. A market with few producers of a certain commodity has a low supply of the product.

This is not an exhaustive list. There are many other circumstances and aspects that influence the readiness of the seller to produce a good, therefore, affecting supply. Government policies and regulations that seek to intervene in the market may have an effect on the ability of producers to sell goods in that market. Examples of government intervention include taxation, wage laws, land use rates and regulations (Krugman & Wells, 67-82). The relationship that classifies supply as well as the issues that influence it are represented in a mathematical expression.

The relationship that exists between price and quantity is depicted in a supply curve. The gradient of the curve is positive with all other factors held constant. These factors affect the curve by causing shifts in the curve either to the right or to the left because they affect the quantity of product in the market and not the price of the commodity. There are movements that occur in the curve because of alterations in the price charged for the commodity at the given quantity in the market. Conventionally, the dependent variable is placed on the y-axis with the independent factor being scaled on the x-axis. This implies that the price is put to scale on the y-axis, and the quantity of the goods is put to scale on the x-axis. The price elasticity of demand gauges the sensitivity of quantity to price and is determined by the response time, the intricacy of the manufacturing procedure and the producer’s inventories or capacity to store.

Demand

It refers to the consumer’s willingness and desire to pay a specific price for a commodity or service, the quantity of a product that is desired by consumers. The association shared by the price and the quantity of goods or services demanded is depicted in a demand curve that usually slopes downward. It is interpreted that as price decreases, the quantity of the product or service demanded increases with all factors held constant The converse is true. There are innumerable factors that affect the ability or willingness of a customer to procure a product. The following are some of the common factors (Rossana, 75-8)

Price of the commodity: there exists an antagonistic association linking the price of goods and the quantity demanded exemplified by the downward sloping curve of a demand curve. A rise in the cost of a commodity leads to a decrease in the quantity demanded which shifts the demand. If the price of new equipment is high, an individual may prefer to repair the existing one hence, quantity demanded decreases. Conversely, a drop in prices will increase the demand of a product.
Price of related goods: related goods may refer to perfect complements. They tend to behave as single good; therefore, a rise in the cost of one may subsequently lead to a decrease in the demand. An example is hotdogs and mustard where the rise in the cost of mustard will result in decreased demand for hotdogs. Substitute goods are another category of related goods. The decrease in price of a substitute good lowers the demand for a primary good. If the price of ketchup goes down, the demand of mustard will go down.
Personal disposable income: an increase in the income of consumers increases their demand for consumables shifting the demand curvature to the right while a decrease leads to a decrease in demand shifting of the curvature to the left.
Buyer’s tastes and preferences: the desire of a customer to buy a product is guided by their preference for that product above the others in the market. This desire is a measure of the consumer’s willingness to buy that product based on the properties of the product. Demand for a product is what ensures that desire is converted to a purchase decision. Tastes and preferences for a particular product are assumed to be constant.

The mathematical expression depicting the relationship between quantity of a commodity and the factors that affect demand is the demand equation. This relationship is exhibited graphically as a demand curve, which is negatively sloped with all factors held constant. The independent variable is plotted on the y-axis while the independent variable is on the x-axis, that is, price against quantity (Mankiw & Scarth, 76-90). The negative slope is a consequence of the income and substitution effects. The substitution effect is seen where the consumer prefers a more expensive good if the relative price of the original goods falls. The purchasing power of the consumer is depicted in a situation where the price of goods falls leaving the consumer with more money to purchase more consumables. This is the income effect on the demand curve.

There are two changes that can take place on a curve. A change in the length of the curve is as a result of alterations in the cost of a product, which leads to a change in quantity demanded. On the other hand, a shift in the curve takes place because of other factors not related to the price of the commodity. A leftward shift indicates a decrease in demand while a rightward shift shows an increase in the demand. The shifts represent a new demand equation. This demand curve and its changes are applicable in a perfectly competitive market where the producer’s options are limited to the how much they can produce. In a less than competitive market, the firm is the price setter, that is, it has the ability to decide how much to charge for their products and services.

Supply and demand

It is an economic representation of the determination of price in a market. In a competitive market, the price of a commodity will fluctuate until it stops at the balance of price and quantity. There are four laws that govern supply and demand (Parkin, 40-6):

Increase in demand with supple unchanged leads to higher price and quantity.
Decrease in demand with supply unchanged leads to lower price and quantity.
Unchanged demand with increase in supply leads to lower price and higher quantity.
Unchanged demand with decrease in supply leads to higher price and lower quantity.

A graphical representation of the supply and demand curvature consists of the merging of the supply curve with the demand curvature. The equilibrium is attained from the intersection of the two curves. This is a partial equilibrium where the prices of complements and substitutes, and the disposable income are held constant. It makes analysis of the equilibrium model simpler.

There are two assumptions made to attest to the legitimacy of the demand and supply representation. The first is that demand and supply are independent of each other. The second is that supply is inhibited by an unchanging resource. The general equilibrium model does not conform to the definition of aggregate demand, which is the disparity between the amount demanded and that supplied as an equation of the price. The supply and demand curvature only intersects once. The model of prices assumes a perfect competitive market although such a market does not exist since all the participants are price-takers without a setter to eliminate excess demand.

Works Cited

Blanchard, Olivier. Macroeconomics. Upper Saddle River, N.J: Pearson Prentice Hall, 2010. Print.

Krugman, Paul R, and Robin Wells. Macroeconomics. New York: Worth, 2009. Print.

Mankiw, N G, and William M. Scarth. Macroeconomics. New York: Worth Publishers, 2011. Print.

Parkin, Michael. Macroeconomics. Boston: Pearson, 2010. Print.

Rossana, Robert J. Macroeconomics. New York, NY: Routledge, 2011. Print.

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