Demand depends on the price of the commodity and refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.
Supply depends not only on the price obtainable for the commodity but also on the prices of similar products and represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.
The law of demand and supply: The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. How? By the following of demand and the law of supply. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.
The four basic laws of supply and demand are: If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.
The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The brief meaning is when the price of a product is increased then less will be demanded. Also is the same for the opposite, when the price of a product is decreased then more will be demanded.
The Law of Supply Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue. The brief meaning is If demand is held constant, an increase in supply leads to a decreased price, while a decrease in supply leads to an increased price.
Factors affecting demand and supply: Price: when the price goes up, demand goes down and vice versa.
Changes in consumers’ Income spent on goods and services
Changes in government fiscal policy and monetary policy
Changes in the growth rate of a Population
Natural disasters (storms, hurricanes, earthquakes, tornadoes, floods etc)
Changes in the Tastes/Preferences of consumers for goods/services
Changes in the state of the art of business firms
Nature of the good is basic commodity, it will lead to a higher demand
As more or fewer producers enter the market this has a direct effect on the amount of a product that producers are willing and able to sell
The producer’s expectations
Paragraph of demand and supply( with an example) C:UsersRioDesktopsupply_and_demand.gif The perfect competition: Perfect competition is a theoretical market structure, Also is market structure where there are large number of buyers and sellers who are willing to buy or sell a product or service at a given price basically used as a benchmark against which other market structures are compared. Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. Economists have become more interested in pure competition partly because of the rapid growth of e-commerce in domestic and international markets as a means of buying and selling goods and services
Basic assumptions required for conditions of pure competition to exist ” Essentially these factors exist to prove that firms in perfect competition have no influence over other competitors or over the demand for its own goods.
Large Number of Small Firms Each firm produces only a small percentage compared to the overall size of the market output. If one firm decides to double its output or stop producing entirely, the market is unaffected. The price does not change and there is no discernible change in the quantity exchanged. The meaning is firms has no control over the market price.
Many individual buyers, none of whom has any control over the market price
Firms have the freedom of entry and exit from the industry.” They are not restricted by government rules and regulations”
Perfect knowledge: In perfect competition, buyers are completely aware of sellers’ prices, such that one firm cannot sell its good at a higher price than other firms. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price. other words, there are few transactions costs involved in searching for the required information about prices
Monopolies A monopoly exists where there is only one supplier of a product or service. This allows the supplier to charge higher prices than if there was competition
The meaning of monopoly is that there is no competition and therefore the supplier has a very high degree of pricing power
Monopolies can arise in a number of ways including:
By developing or acquiring control over a unique product that is difficult or costly for other companies to copy
By using various legal and/or illegal tactics such as an agreements by former competitors to cooperate on pricing or market share “illegal in most countries”. And/ or taking control of suppliers of inputs required by competitors or conspiring with them to raise their prices (or lower their quality of service, etc.) to competitors
The Non Price Determinant Factors Economics Essay
In this assignment I am going to explain the economic concept of Owner occupied Residential. The assignment generally includes examples and graphical analyses to demonstrate the issues that will affect the owner occupied residential market.
The housing market of any country or places is determined by a range of demand and supply factors. There is always a demand for housing; the main reason for that is mainly due to population growth, the life expectancy rates improved, and also the incline of one person household. Furthermore, as the demand is high consequently there also will be a supply.
Owner occupied sector means that the householder who ultimately live and own at the same property. The property types can differentiate as house, flats, apartment, bungalows and etc.
The non- price determinant factors affecting the supply to change: Construction Cost
Government Polices i.e. tax benefits or building social housing
Supply for owner occupied housing: The supply curve is upward sloping, but to determine the supply for housing, it is mostly decide by the house prices; therefore when house prices are high, this will encourage more people to built houses and the curve will shift itself as an increase or decrease in supply. For example, when advance building technology takes place, it is a way that can reduce the cost on building houses, and increasing the revenue for suppliers, the supply curve S1 will ultimately shift to the right S2, as shown in graph 1.0, this represents an increase in the quantity supply at each and every price such as using the prefabrication technique, it will reduce the construction period and labour cost comparing with the in-situ technique.
In another hand when the cost of the building houses increase, i.e. when the availability of labour are less, it will raise the labour cost. This will lead the supply decrease, and to apply this to the graph 1.0, the supply curve S1 will then shift to the left S3. http://www.tutor2u.net/economics/revision-notes/as-markets-supply_clip_image002.gif
The non- price determinant factor affecting demand to change: The current price of housing
Income and life expectations rates of change
Statistics of the number of households
Government polices i.e. tax benefits or building social housing
Mortgage and interest rates
Demand for owner occupied housing: The demand curve is downward sloping from left to right and when demand curve shift to the right or left it will represents an increase or decrease of demand. Through graph 1.1, the demand curve D shift to the right D1 indicates that when there is more demand on properties. This fact can be achieve by the non-price determinant factor, i.e. when mortgage interest rates are low, it will made the property more affordable, and also increasing the demand.
In another hand, to decrease the demand will depends on the non-price determinant, i.e. When prices of housing are expected to fall the quantity demand will decrease because buyers will wait for a lower prices and therefore will decrease the demand which will shift the demand curve onto the left D to D2.
Elasticity of Demand: Elastic Demand: Elasticity of demand shows the changes to demand in relation to the price. Elastic demand means the price will not change much, but the quantity of the demand will have a higher rate. Properties which are elastic are normally luxury and it has a very competitive market and many alternatives.
Diagram: Elastic Demand Curve
Inelastic Demand: The demand curve in inelastic demand is steep, and it is dictated by the quantity of demand does not change to the same amount as the price do. Therefore, the more inelastic the demand is the more steeper the curve is.
In a short term run, when the price of house increased, the demand will be inelastic as there are no other choice and it requires time to find other close substitutes.
Diagram: Inelastic Demand Curve
Perfectly Elastic Demand: Perfectly elastic demand shows a horizontal line. This means that elasticity in demand is perfect, the reason for that is when there is any change in price and the demand slightly decline or nothing, then the price elasticity of the product is infinity. For example, when the supplier increases the price above the market equilibrium the demand will evaporates as the buyers will choose the cheaper option.
Diagram: Perfectly Elastic Demand Curve
Perfectly Inelastic Demand: Perfectly inelastic means that quantity demanded or supplied is unaffected by any change inprice. In other words, the quantity is essentially fixed. It does not matter how much price changes, quantity does not budge. Perfectly inelastic demand occurs when buyers have no choice in theÂ consumptionÂ of a good. In an analogous way, perfectly inelastic supply occurs when sellers have no choice in the production of a good.
Diagram: Perfectly Inelastic Demand Curve
Elasticity of Supply: Inelastic Supply: When the quantity of supply is less than the increase in price, then the price elasticity is described as inelastic. According to graph 10000 the supply curve is shallow due to the given change in price there is a smaller change in supply.
For example when government have announced to build more social housing, the houses will not be constructed immediately, because it takes time for the legal complexities, obtaining planning permission and also the construction period. In the short term the construction are price inelastic and this will classified as supply inelastic.
Diagram: Inelastic Supply Curve
Elastic Supply: When the quantity of supply is greater than increase in price, then the price elasticity is described as elastic. The curve which is shown in figure 1000 indicates for a given change in price there is a greater change in supply.
The most important issue to determine the supply whether is elastic or inelastic, time tends to be the main matter, in long term supply the quantity of houses will increase and it will therefore becoming more elastic.
Diagram: Elastic Supply Curve
Perfect Inelastic Supply: The supply curve is vertical as the quantity of the product remains steady and it is produce regardless on any price.
For example, land is perfectly inelastic supply due to houses price increase and the land supply remains the same. Areas that are not developed can built up, in addition developed areas can also change its land use, however these are time consuming.