Demand And Supply Essay Research Paper Every

Demand And Supply Essay, Research Paper

Every organisation which provides goods or

services to fee paying customers must, by its very

nature, charge price for that good or service, to

pay for its costs, have retained profits for

investments and to keep its shareholders happy. In

theory, the market price of any good or service is

determined by the interaction of forces of demand

and supply. There is an old saying, that .if you can

teach a parrot to say .demand. and .supply. you

have created a trained economist..1 There is some

truth to this saying as most problems in the

economics can be examined by applying the rules

of demand and supply. Therefore, the concepts of

demand and supply can be claimed to be among

the most important in economics. In order to

understand either of them it is necessary to

examine the factors that determine them. Although,

a good.s price relative to other goods is probably

the most important factor influencing demand for

most goods most of the time, there are other

factors as well. These are disposable income, the

price of complimentary goods and substitutes,

tastes and preferences, expectations, size of

population, advertising. Suppliers on the other

hand are interested in making profits, and thus

anything that affects profitability affects the supply.

These include the price of other products, costs,

technology and goals of firms. a) The price of any

product is determined by the interaction of the

forces of demand and supply. The market price is

set at the point, where demand equals supply,

equilibrium. This can be seen from figure 1. For

the purpose of this essay we will look at the prices

of beer. We can see that, the price is set at 1.65,

where D intersects S. Fig. 1 The Penguin

dictionary of economics defines demand as .the

desire for a particular good or service supported

by the possession of the necessary means of

exchange to effect ownership., while supply is

defined as:. the quantity of a good or service

available for sale at any given price.2. When an

economist refers to the demand for a product he

means effective demand, which may be defined as

.the quantity of the commodity, which will be

demanded at any given price over some given

period of time..3 However, the price of the good

or service varies according to the changes in either

demand or supply. In order to show that it is

necessary to look at determinants of demand and

supply separately. One of the factors that might

affect the demand for beer is a disposable income,

income less taxes. For most of the products, when

disposable income goes up the demand goes up as

well, and vice versa, thus affecting the price of the

product. A rise in income leads consumers to buy

more of a product, as they have more money to

spend. This can be seen from figure 2. Fig.2 Thus,

we can see that, when income rises, demand shifts

to D1, and since S curve remains the same, the

price of beer goes up to 2.00. The other factor

that influences demand for beer, could be the

change in consumer tastes and preferences. Some

industries like clothing and furniture are more

affected by it than the others. However, in beer

market it also has a great effect. It can go out of

fashion if consumers believe that, it is more

fashionable to drinks spirits or not to drink at all,

and vice versa consumers might decide that beer is

more fashionable than spirits. The effect of fashion

and tastes on the prices can be seen from figure 2.

If beer becomes less popular D shifts to D2 and

the price becomes 1.45, while if it is more

fashionable D shifts to D1 giving the new

equilibrium price of 2.00. Another factor, which

influence demand, is the price of other products,

substitutes or complementary goods.

Complementary goods are purchased together to

satisfy one want, and these goods are in joint

demand. For beer, the best example could be

pubs and night clubs. If the prices of admission to

night clubs goes up, the demand for beer is likely

to go down and thus the price will go down, so in

figure 2 the D curve will shift to D2 thus giving the

new equilibrium price of 1.45. On the other hand,

if night clubs were to make the admission free

more people would go and they would have more

money to spend, thus shifting D curve for beer

would shift to D1 giving the new price of 2.00. In

modern world the advertising can also cause

changes to the demand. A successful advertising

campaign can increase the demand, and thus

price, by shifting the demand curve to the right and

at the same time move the demand curves of the

competitors to the lef

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