Microeconomics: Theory of Supply and Demand - Report Example

Microeconomics: Theory of Supply and Demand Student Name: University: Subject: Instructor: October 30Th, 2013. Economics: Theory of Supply and Demand As one of the pillars of sustainability, it is crucial to consider the role of economics in realising a more equitable and balanced society. Current economic systems have the tendency to importantly contribute to the depletion of resources, increasing the gap of inequality and, a make- take- waste mentality. Economics can however, be a source of considerable change towards sustainability. The main goal of economic sustainability is to establish economics that are economically viable, socially responsible, and environmentally sound. Realising this goal needs the participation from all the sectors of the economy, both in identify and determining the economic needs and implementing appropriate innovative solutions (Colander, 2004). Proper economic sustainability encourages the responsible resource use, through ensuring the businesses are not only making business, but are their operation is not creating an imbalance the local ecology. Although, the concept of economic sustainability looks rather simple, its implementation is often hampered by a number of obstacles such as resistance to change which often leads to inefficient utilization of the available resources. Basically, the objective of economic sustainability is to ensure that the business remains profitable and continue to grow every all the time (Nicholson, , 2004). We appreciate that eradicating poverty, altering unsustainable and fostering sustainable patterns of production and consumption, while managing and protecting the natural resource base of social and economic growth are the primary objectives of and essential needs for sustainable development. I also need to reiterate the desire to achieve sustainability by promoting equitable distribution of resources through the reduction of inequalities, and promoting a sustainable and integrated management of natural systems and ecosystems that support among others economic, social and human development while at the same time facilitating the conservation , restoration and regeneration in-light of the emerging challenges. Supply, Demand and Market price Let’s take an example of serving meal at a restaurant; the first food served in a mean takes delicious, if one is hungry. The second serving may taste good, but the third and subsequent serving most people would have had enough. As a result, the amounts or quantities of commodities consumers are ready to buy is inversely proportional with its price. This is the law of demand. As people use more energy and time in producing commodities, they require more remuneration to offset the rising scarcity of both energy and time loft for other uses. So the quantity of labour they are willing to supply directly varies with the salaries and wages. Consequently, producers willing to pay more salaries produce higher amounts of output only if they receive more to cover the added costs of production. At this juncture consumers would be willing to buy more if only the commodity prices were lowered while the sellers would have sold more if the prices were made higher. A compromise is thereafter arrived at and that is the market price. The current economic models of demand and supply is often utilized at the policy planning level, and sustainability economics is majorly used in the development of alternative emerging marketing strategies so as to sustain economic growth. Supply, demand and market price, certainly is among the most powerful economic concepts. Frankly, the real world where sellers and buyers operate is a lot more complex that the above explanation, however the underlying principle is similar. One of the key aims of economics especially microeconomics is to analyse the mechanisms that occur within a market and thereby establish relative prices of goods and services due to resource limitation amidst a lot of alternatives (Arnold, 2010). We can therefore conclude that economics though often called ‘dismal science’ is in fact the study of aspects of society. In studying society, economics makes an assumption that human beings will always aim at fulfilling their self-interests and that they are always rational in the quest to fulfil the unlimited needs and wants. In economic s, the theory of supply and demand is regarded as the most fundamental principles that govern any economic set up. In most economic study materials, the theory is termed as the scenario whereby the an increase in the demand of a particular product causes the rise in the respective price of the commodity, while an increase in supply of the same product leads to a reduction in prices, and vice versa. Basically, this is the principle which majority of business people naturally consider in regard to the market relationship of goods and services against the supply and demand of those goods and services. Ideally when demand and supply are in a form of balanced state, such an economy is said to be at equilibrium between quantity and supply (Nicholson, , 2004). Demand and supply is perhaps among the most fundamental economics concepts and has been assumed to be the backbone of market economy. Basically, demand gives the quantity that consumers are willing to purchase at the prevailing prices of the particular product, while supply gives the quantity of goods and services are the sellers are willing to supply at the prevailing market conditions such as prices (Hirshleifer, et al., 1998.). The correlation between the two variable s is called the supply- demand relationship. Price gives the reflection of the demand and supply. This kind of relationship results to phenomena where demand can be said to inversely proportional to price, and supply is directly proportional to price as shown in figure 1 and 2 respectively as shown below. Figure 1: Demand vs. Price Figure 2: Supply vs. Price From the above simple explanation, it is the theory appears to be a simple principle; economic a ‘law’ and is it really true? To understand better, it is important for us to appreciate certain facts that occur in day to day economics life. At the root of any business dealings, there lies supply and supply. It is not at all farfetched to think these are merely human behaviours. Since human beings will never be self-sufficient, they will therefore keep producing certain commodities that they need to trade in so as to fulfil their never ending needs and wants. The specialization of production and the institutions concerned with commerce, trade, and markets go long before the science of economics. One of the main items regarded on the supply side of trade is labour i.e. wage and salaries. “…as wages rise, the supply of goods and services is reduced, because wages are the input price of labour. Labour accounts for about two-thirds of all input costs, and thus wage increases create supply reductions …” (Introduction to Economic Analysis, McAfee) (Colander, 2004) Very true! This sounds not only true but an obvious statement. However, it is important for us to examine the demand side of such a relationship. How is it, how does occur and finally how it manifests itself. In order for us to understand and explain the above queries, let’s consider a typical case of a problem emanating from the theory model. It’s apparent that there is no independent demand side of an equation. Demand has to unavoidably be based on the consumption of commodities arising from the supply side. This means that in order for the demand of a particular commodity to be satisfied, there must be some trade in exchange of the concerned items. In these days, the trade is through credit, i.e. the use of money. We can now conclude that there is no independent demand side. So the question now is where does the “demand side” or consumer get the money from? The definite answer is; from the supply side of the transaction. This means that, in actual sense, what was earlier stated that about the labour costs being some of the input costs, in actual sense, what is happening is that the supply side herein being the labour costs is creating or subsidizing the consumer in the demand side of the transaction. Therefore, there is no independent side of demand (Hirshleifer, et al., 1998.). Equilibrium Classical economic theory provides a model of supply and demand that explains the equilibrium that is arrived at in a single product market. The intricacy involved in the realisation of this equilibrium is somehow complicated for average students at this level of study. However, scientists have developed understanding which believes that equilibrium of demand and supply is determined by price (Arnold, 2010). This is a virtual point whereby it is assumed that demand and supply is equal i.e. when the demand and supply curve intersect. At this point, it is believed that, the allocation of goods is at its most efficient point, meaning that the goods being supplied are equal to the amount of goods the consumers are demanding. This means the concerned parties within the transaction are satisfied with the market conditions. Figure 3: Equilibrium Between Suppply and Demand As evident from the figure 3 shown above, it is evident that the market equilibrium occurs at the point where supply and demand curve intersect, a point which indicates allocative inefficiency. The corresponding prices and quantities are indicated as P* and Q* respective as indicated in the same figure. Elasticity This refers to the degree to which a supply curve responds to a change. Elasticity depends on products under consideration since some goods and services may be more essential to the consumer than others. Essential and thus more necessary products are more insensitive to changes in prices since no matter what they will still continue purchasing the products. Likewise, price increase of products considered to be less essential will deter more potential consumers since there is often a high opportunity cost. A commodity is assumed to be highly elastic is a small price change leads to a sharp change in quantity supplied or demanded; conversely an inelastic product is the one in which unit price changes experience modest changes in the quantities supplied and demanded (Hirshleifer, et al., 1998.). Elasticity of demand is affected by a number of factors; first is the availability of substitute products. If a product has an equal or similar alternative such as coffee and tea, means that an increase in the price of one commodity leads to a sharp decrease in demand since customers will begin purchasing the alternative commodity. Sometimes the income at disposal also affects the elasticity of a product. For instance if rent increases, consumer with fixed income will be forced to forgo some luxuries for instance taking of cold beverages. This means that rent is inelastic thus any increase will affect the demand of elastic commodities in the budge (Nicholson, , 2004)t. Conclusion The current economic models of demand and supply is often utilized at the policy planning level, and sustainability economics is majorly used in the development of alternative emerging marketing strategies so as to sustain economic growth. Supply, demand and market price, certainly is among the most powerful economic concepts. Frankly, the real world where sellers and buyers operate is a lot more complex that the above explanation, however the underlying principle is similar. Demand and supply will always remain as the great unifying concepts of microeconomics. The normative suggestion of microeconomics emanates from the principle that competitive price of the supply proves the value of the commodity as seen by the supplier, while the demand price represents the value attached by the consumer to the commodity. The motivating force therefore is that human beings always incline towards options, choices and arrangements reflect their preferences and tastes. The sensation is although the basis looks not only simple but straightforward, a rich embroidery can be woven from the analysis and insights seeking to deeper understand what seems to be obvious. This lesson gives a brief and insightful glimpse of the whole issue of market forces. References Arnold C. Harberger Microeconomics. The Concise Encyclopedia of Economics [Online]. - 2010. - October 28, 2013. - http://www.econlib.org/library/Enc/Microeconomics.html. Colander David C Microeconomics. [Book]. - Boston: : McGraw-Hill/Irwin, , 2004. - Vol. 5th ed.. Hirshleifer Jack, and David Hirshleifer Price Theory and Applications. [Book]. - Upper Saddle River, N.J. : Prentice Hall,, 1998.. - Vol. 6th ed.. Mankiw N. Gregory Principles of Microeconomics [Book]. - MasonOhio:  : Thomson/South-Western, , 2004. - Vol. 3d ed. . Nicholson, Walter Intermediate Microeconomics and Its Applications [Book]. - Mason, Ohio: : Thomson/South-Western, 2004. - Vols. 9th ed, 2004.. Read More