Question

Week 2 Case Study: Supply and Demand

A market exists whenever buyers and sellers meet to exchange goods and services. A mall is a market, a street is a market, your classroom is a market, a garage sale is a market, and even the airplane you ride is a market. Markets are everywhere. Their primary purpose is to get suppliers (producers) and demanders (buyers) together to sell and buy at a price they both agree on.

Market demand represents the sum of the individual demand for a commodity (a good or a service) from buyers in the market. On the other hand, market supply represents the total quantity of a commodity that producers are willing and able to provide to the buyers at a given price level. Market equilibrium occurs where the quantity supplied equals the quantity demanded, and the market price (equilibrium price) is set at that quantity (equilibrium quantity).

The equilibrium price and equilibrium quantity are not static, however, meaning that they change due to changes in market demand or market supply.

A commodity or an idea might be a “hot item” and very popular at one point in time where people are willing to pay a high price for it, and producers will be willing to produce more of it because it is profitable. Smoking a cigarette at one point in time was considered a symbol of “a tough man” and smoking was acceptable everywhere, including inside hospitals! But what has changed for cigarettes? Whenever the demand for a commodity rises or declines, and whenever the production of a commodity expands or shrinks, it is certain that at least one market force or a set of market forces have taken place to cause this change. At the same time, whenever market demand and/or market supply changes, the market price and the quantity of that commodity available in the market changes, too.

Dynamic and free markets are constantly changing due to changes in factors (determinants) that affect either demand, supply, or both. Analyzing and understanding the forces behind the shift in market demand and market supply determines the growth pattern of the commodity.

Assignment Description

In this assignment, we are going to analyze the changes in market demand and market supply for a commodity (a good or a service). In addition, we will also analyze how the changes in demand and supply affected the market price and production of this commodity. To do so, we will are going to address the key factors (determinants) that have caused the shift in demand and/or the shift in supply. The goal here is to provide an objective analysis of the forces that have caused this change in order to better understand the behavior of the market and to determine the potential growth or decline for this commodity. Some of the commodities that have experienced a drastic change (an increase or a decrease) in supply and/or demand in recent years are organic foods, cage-free eggs, social media, higher education, online education, healthcare services, online banking, online shopping, DVD players, digital cameras, fidget spinners, health clubs, bottled water, landlines, Cash for Gold, and fried food. You could use one of these commodities for your study or choose one you are familiar with or prefer.

To start, select a commodity that you wish to analyze to determine changes in its market demand, market supply, equilibrium quantity (output), and equilibrium price.

Your research should be structured with consistent and clear thoughts. It should be supported by facts and data, and you must base your results on these facts. Your conclusions should be thorough and based on your findings and understanding of supply and demand determinants.

Answer 1

Demand of a product increases or decreases due to following factors which are also called as determinants. The five determinants of demand are:

1. The price of the good or service.

2. Income of buyers.

3. Prices of related goods or services. These are either complementary, those purchased along with a particular good or service, or substitutes, those purchased instead of a certain good or service.

4.Tastes or preferences of consumers.

5. Expectations. These are usually about whether the price will go up.

For aggregate demand, the number of buyers in the market is the sixth determinant.

Price. The law of demand states that when prices rise, the quantity of demand falls and vice versa. If the quantity demanded responds a lot to price, then it's known as elastic demand. If the volume doesn't change much, regardless of price, that's inelastic demand.

Income. When income rises, so will the quantity demanded and vice versa but it doesnt mean that if your income doubled then quantity demanded will also double, demand is also affected by the law of diminishing marginal utility where more we consume, the less we will be willing to pay for that product.

Prices of related goods or services. In case of complementary goods the decrease in demand of one product will cause decrease in demand of another product but in case of supplementary goods the decrease in demand of one product will cause increase in demand of another product as in case of substitute goods we buy one product instead of another in case of complementary goods by one product for the benefit of other product.

Tastes. When the public’s desires, emotions, or preferences change in favor of a product, so does the quantity demanded and if they change against the product, the demand will decrease.

Expectations. When people expect that the value of something will rise, they demand more of it now and if they expect that the value will decrease in future, then demand less of it now.

The following are the determinants of supply other than the price.

Number of Sellers

Greater the number of sellers, greater will be the quantity of a product or service supplied in a market and vice versa. Thus increase in number of sellers will increase supply and shift the supply curve rightwards whereas decrease in number of sellers will decrease the supply and shift the supply curve leftwards. For example, when more firms enter an industry, the number of sellers increases thus increasing the supply.

Prices of Resources

Increase in resource prices increases the production costs thus shrinking profits and vice versa. Since profit is a major incentive for producers to supply goods and services, increase in profits increases the supply and decrease in profits reduces the supply. In other words supply is indirectly proportional to resource prices. Increase in resource prices reduces the supply and the supply curve is shifted leftwards whereas decrease in resource prices increases the supply and the supply curve is shifted rightwards.

Taxes and Subsidies

Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in taxes increase supply. Subsidies reduce the burden of production costs on suppliers, thus increasing the profits. Therefore increase in subsidies increase supply and decrease in subsidies decrease supply.

Technology

Improvement in technology enables more efficient production of goods and services. Thus reducing the production costs and increasing the profits. As a result supply is increased and supply curve is shifted rightwards. Since technology in general rarely deteriorates, therefore it is needless to say that deterioration of technology reduces supply.

Suppliers' Expectations

Change in expectations of suppliers about future price of a product or service may affect their current supply. However, unlike other determinants of supply, the effect of suppliers' expectations on supply is difficult to generalize. For example when farmers suspect the future price of a crop to increase, they will withhold their agricultural produce to benefit from higher price thus reducing the supply. In case of manufacturers, when they expect the future price to increase, they will employ more resources to increase their output and this may increase current supply as well.

Prices of Related Products

Firms which are able to manufacture related products (such as air conditioners and refrigerators) will the shift their production to a product the price of which increases substantially related to other related product(s) thus causing a reduction of supply of the products which were produced before. For example a firm which produces cricket bats is usually able to manufacture hockey sticks as well. When the price of hockey sticks increases, the firm will produce more hockey sticks and less cricket bats. As a result, the supply of cricket bats will be reduced.

Prices of Joint Products

When two or more goods are produced in a joint process and the price of any of the product increases, the supply of all the joint products will be increased and vice versa.

Let's take an example of social media, with change in technology, taste and preferences of the customer and with the increase in competitors, social media has grown a lot from the past few years. Aggregate demand has shift to right and also there is a shift in aggregate supply due to lots of competitors like Facebook,whatsApp,Twitter ,instagram and many others hence the new equilibrium point shall be at increased aggregate demand and increased aggregate supply ,where the quantity demanded will also high and the price will also be high.