Econ Assignment Nu

7/23/2019 Econ Assignment Nu

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Economics is the social science studying production and consumption through measurable variables. It

involves analyzing the production, distribution, trade and consumption of goods and services. Economics is

said to be positive as it attempts to explain the consequences of different choices, given a set of assumptions

or a given set of observations and normative when it prescribes that a certain action should be taken. To

simply put it, economics is really the study of how individuals, businesses (suppliers and the creation of

supply),governments use their limited resources to satisfy unlimited wants (demand).This paper however

focuses on the economic concept of demand and supply and how through its interaction the market

equilibrium is achieved.

It seeks to answer to the following questions

1. Explain why shortages and surpluses of goods in a market imply that it is not in equilibrium

2. What opposing forces balance the market equilibrium?

3. n increase in the popularity for !" players increase the demand for !" disc use supply and demand

analysis to show the impact of the increase in demand on the price of the !" disc.

!efore these questions are answered, one must have a clear understanding of the basic economic concepts.

The first being that of demand and supply, There are a number of factors that affect the demand and supply of

a product. The level of demand is determined by factors other than price, for example the level of incomes,

tastes and advertising levels. " shift in the curve occurs when a factor other than price changes causing a

change in the level of supply or demand "T E#E$% &$I'E.

(o no matter what the price is, there is either more or less demanded or supplied. )or example, if incomes

increased we would expect the demand for most goods to increase at all prices. " movement along the curve

shows the response of consumers and producers to changes in price alone. *ovements along the curve will

occur when there has been a shift in either the demand or supply curve causing a surplus or shortage in the

market, as market forces cause price to either rise or fall, consumers or producers will respond to the

changing price altering the quantity they wish to buy or sell.

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&rice elasticity is another important concept because it tells us how responsive the demand or supply will be

to changes in price. If prices rise by ten percent will the demand or supply fall or rise by less than ten percent

or more than ten percent and if so by how much This is important to businesses because it influences their

behavior in terms of pricing strategies and the degree of market power they exercise. (ome businesses areable to charge different prices for the same product at different times because the degree of elasticity is

different - for example, electricity prices, or happy hours at your favorite bar. Elasticity has an important

influence on the total revenue earned by the firm following changes in price and is therefore very important

in analysing the extent of the impact on a market as a result of a change in demand and supply conditions.

The ceteris paribusprinciple is important because it allows us to identify the impact of a change in the

market on that market. In reality, changes in demand and supply are occurring all the time, it would be

extremely difficult to be able to make any sense of what is happening and why without using this principle.

In reality demand and supply are constantly changing but in order to try to assess the impact of such changes

on markets we adopt a principle called ceteris paribuswhich means other things remaining equal.

In effect in economics, we always start at an equilibrium position imposing some change - usually /ust the

one change - and then explain what happens to the market. This now brings us to the question#Explain why

shortages and surpluses of goods in a market imply that it is not in equilibrium andwhat opposing forces

balance the market equilibrium? $

To answer this question one must define the term market equilibrium. *arket equilibrium is defined as the

point at which the price consumers want to pay and the quantity that suppliers want to supply meet. In many

aspects of economic analysis, we tend to assume that a condition of equilibrium exists with respect to key

economic variables. 'ommon examples include different models of market behavior known as supply and

demand analysis.

In these models of the market, the behavior of sellers are based on the goal of profit maximization in the

production and0or sale of a particular good. 1igher selling prices allow a seller to reap a gain over and above

the price initially paid for a final good or asset. In the case of business firms, the production of additional

units of a particular good involve increasing opportunity costs in drawing resource inputs away from other

productive uses. 1igher prices are necessary to cover these increasing costs of production. Thus, these types

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of behaviors on the selling side of the market typically lead to a positive relationship between market price

3the dependent variable4 and quantity supplied 3the independent variable4.

(eparately, the behavior of buyers is based on the goal of maximizing the utility gained from the purchase

and consumption of this same good. "s prices fall, holding income constant, the buyer finds that his0herpurchasing power has increased allowing for buying greater quantities of a particular good. It is also the case

that, for the consumer, additional quantities of a good consumed provide less additional satisfaction relative

to previous units consumed. This notion known as diminishing marginal utility implies that the consumer is

willing to pay less for these additional units as it becomes more efficient to use his0her income for the

purchase of other goods. )or the buyer, these types of behaviors typically lead to a negative relationship

between the market price 3dependent variable4 and quantity demanded 3another independent variable4.

It is best to understand what is behind each curve5 the demand curve shows the quantity demanded by

consumers at various prices 3if everything else is held constant4. The curve illustrates what happens to the

quantity consumers will buy when price changes. 6Everything else held constant6 means that the graph

shows the effect of a different price on the quantity demanded without mixing in other changes that could

effect quantity demanded. The demand curve shows a negative relationship between price and quantity

demanded. "s you would expect, consumers buy more when the price is low and less if, the price is high

3wouldnt you4. This is why the demand curve has a negative slope 7 it illustrates the 68aw of 9emand6.

This can be illustrated in the following diagram

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The supply curve represents producers in the market the same way the demand curve represents consumers in

the market. The supply curve shows he quantity supplied by producers at various prices 3if everything else is

held constant4. The curve illustrates what happens to the quantity producers will sell when price changes.

6Everything else held constant6 means that the graph shows the effect of a price change on the quantitysupplied without mixing in other changes that cold effect quantity supplied. The supply curve shows a

positive relationship between price and quantity supplied. "s you might expect, producers will sell more only

if the price is higher. It generally costs producers more to produce more and therefore they will only sell

more if they receive a higher price for the quantity they sell. &roducers will sell less when the price is lower.

This is why the supply curve has a positive slope 7 it illustrates the 68aw of (upply6 This can be illustrated

in the following diagram

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)rom the diagram, one can identify the market equilibrium as the point at which the supply of goods and the

demand for those goods meet. >umerically this is the price of ?2:@. This is the point at which the suppliers

willingness to supply is equal to the price that buyers are willing to pay. Ahen the demand exceeds the

supply, you have a situation of excess demand, also known as a shortage. Ahen the demand is less than the

supply you have a situation of excess supply, also know as a surplus. Therefore, it can be said that in cases of

shortages and surpluses that market equilibrium does not exist.

It can be then said that the interaction of supply and demand determines an equilibrium price at a stable

price. !oth buyers and sellers realize they have no real control over the price. !uyers look at the price and

decide how much to buy. (ellers look at the price and decide how much to sell. The result !uyers find they

can buy what they want to buy and sellers discover they can sell what they want to sell. This will only be true

at the equilibrium price.

To understand the idea of market equilibrium, it is useful to remember the general concept of equilibrium.

Equilibrium refers to a balance, where opposing forces are equal and there is no tendency for change. The

concept of equilibrium is not unique to economics or to the supply and demand model 7 it is found in many

models in many disciplines. In the supply and demand graph, equilibrium occurs at the price where quantity

demanded equals quantity supplied 7 the point where the supply and demand curves cross. The best way to

rationalize why this is equilibrium is to think about what happens at prices that are >


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"bove equilibrium, there is a tendency for price to change 3decrease4 7 at equilibrium, there is no tendency

for change. In equilibrium, quantity supplied and quantity demanded are in balance 7 supply and demand

forces are equal. If the price is !E8


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In the above case that the market price has been forced above equilibrium such that supply decisions by

producers with respect to output exceed the amount demanded by consumers. In this case, a surplus is the

result. This surplus is often first recognized by the sellers through the accumulation of inventories.

If the quantity that consumerCs demand exceeds the quantity that producers supply, the market has a shortage.That is, consumers want to buy more than producersC supply. The excess demand for the product signals

producers to raise price. &roducers see that consumers want to buy more than is supplied and realize that they

can sell their product for a higher price. The higher price causes quantity demanded to decrease and quantity

supplied to increase 38aws of 9emand and (upplyD4. &roducers continue to raise price until the shortage

disappears 7 when quantity demanded equals quantity supplied. "ny price below equilibrium will cause a

shortage and lead firms to raise price until the shortage is gone 3at equilibrium4. !elow equilibrium, there is a

tendency for price to change 3increase4 7 at equilibrium, there is no tendency for change. In equilibrium,

quantity demanded and quantity supplied are in balance 7 supply and demand forces are equal.


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In the above situation, the market price has differed from the equilibrium price such that the quantity

demandedexceeded the quantity supplied, a different disequilibrium condition known, as a shortagewould

result.


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1ere are some other factors 3in addition to price4 that will affect the quantity of a product producers will sell.

The costs of production, technology, the number of sellers, and sellers expectations also affect producers

decisions about how much to supply. If any of these change, the quantity supplied at any price will increase

or decrease 7 the supply curve will shift to the right or left. If changes in other factors lead to an increase insupply, the curve will shift right. It should be noticed that on the graph, quantities are higher to the right on

the horizontal axis 3as you move away from the origin4. To the left on the horizontal axis, quantities are lower

7 if the supply curve moves left it shows the change in a factor has led to a decrease in supply.

Increases and decreases in supply are shown on the graph below.

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>ow we should probably consider how these changes would affect the market equilibrium. If there is a

change in a factor that affects supply, the entire supply curve shifts. The old supply curve no longer exists, so

the market moves to a new equilibrium. The new equilibrium is found where the new supply curve intersects

the demand curve 3which hasnt changed4.

)or example, if the cost of production increases and causes a decrease in supply, the change in equilibrium is

illustrated on the graph below.

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In the same fashion if there is a change in a factor that affects demand, the entire demand curve shifts. The

old demand curve no longer exists, so the market moves to a new equilibrium. The new equilibrium is found

where the new demand curve intersects the supply curve 3which hasnt changed4.

)or example, if consumer tastes change and causes demand to increase, the change in equilibrium is

illustrated on the graph below.

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#n increase in the popularity for !" players increase the demand for !" disc use supply and demand

analysis to show the impact of the increase in demand on the price of the !" disc$

Interestingly enough one of the key otherJ factors that will affect the demand for a product is the price of its

compliment. Thus, will also affect the market equilibrium price. " general definition of a complementary

good are used together and are usually demanded together. '9 players and '9s are examples of

complementary goods. 'omplementary goods are not the same as substitute goods and should not be

confused. (ubstitute goods are those that can be used in place of each other. 8ike 'rest and 'olgate, if the

price of 'rest rose, then the demand for the cheaper 'olgate would go up.

In this part of the question, we need to consider the effects of changes in the conditions of demand and

supply on the market for '9 players and '9s. In my example, due to the increase in the popularity of '9

players the demand for such product has increased. 'onsequently, other consumers and I would purchase

more '9 players5 the demand for '9 players would increase, and so would demand for '9s, which is

usually used with '9 players. Thus, '9 players and '9s are /ointly demanded5 they are complements.

!esides popularity, a decrease in the price '9 players can also increase the demand for '9s.Ahen two

products are complements, the price of one good and the demand for the other good move in opposite

directions. 1owever in my example we are really looking at the increases in demand of one complement and

its effect on the other.

Diagram 1Increase in the demand for '9 players Diagram 2the consequent increase in demand for '9s

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To explain the above diagram the demand for '9 players has increased due to a change in taste or fashion

making it popular. The demand curve moves to the right, giving a higher equilibrium price and quantity.

3diagram +4 (ince consumers are demanding more '9 players, they will obviously more '9s the demand

curve for '9s moves to the right as well giving rise to a higher price and quantity demanded. " new demand

curve is drawn to symbolize the change in the conditions of demand. 'onversely if the price of '9 playerswere to increase then the demand for '9s will fall. In this case if this was illustrated on a graph the demand

curve for both products wouldnCt move because the conditions of demand has remain constant. Therefore the

price of a complement good may either decreases or increase the demand for the product.

In conclusion one may now wonder why is this concept of market equilibrium so important. The answer is

obvious since the supply and demand graph describes the relationship between price and quantity in the

market. It can be used to illustrate the effect of changes in the market on equilibrium price and quantity. The

ability to predict how an expected change will affect market price or quantity can be very useful. )or

example, on the supplier side a firm can more accurately determine how much to produce, one the demand

side a consumer can determine whether the price of a good they plan to buy will increase or decrease and an

investor can better predict when to 6buy low6 or 6sell high6D

price of related goodscomplements

" change in the price of one good can change the demand for another good.


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related goods is complements-goods that are purchased together. " decrease in the price ofstrawberries will cause an increase in the demand for whipped cream. "n increase in the priceof hamburger will cause a decrease in the demand for hamburger buns.

The price of the substitute good and demand for the other good are directly related. If the price of'oke rises 3because of a supply decrease4, demand for &epsi should increase.

ii. 'omplementary goods 3those that are used together like tennis balls and rackets4 Ahen goodsare complements, there is an inverse relationship between the price of one and the demand forthe other.

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Econ Assignment Nu

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