Demand, Supply and Market Equilibrium – Discussion

1 Demand, Supply, and Market Equilibrium

Think about a product that you have purchased recently (e.g. soda, takeout meals, milk, shoes, manicure/pedicure, video game, etc.). Explain how the law of demand affected your purchase. Give specific examples of how the determinants of demand and supply affect this product

(T-I-P-E-N and P-R-E-S-T). What happens to the demand curve and the supply curve when any of these determinants change? Give examples of scenarios that would cause a change in demand versus a movement along the same demand curve and supply curve for this product. Discuss the new equilibrium price and quantity that result from these changes. Can you demonstrate some of these changes graphically?

 

  1. Price Elasticity of Demand

Think of another good that you have purchased recently (or you could continue with the good you selected in TDA 1). Be specific (e.g. is it breakfast cereal in general or Cheerios cereal specifically). If the price of this item increases, how would this affect the quality of the good that you consume? Is the Demand for this good price elastic or price inelastic? Justify your classification by talking about the determinants of elasticity as they apply to this product. Say price is on the rise for this product and your are the manager of a store, would you be thrilled to be selling this product? Under what circumstances would you want to own a business that sells this products? In other words, how does an increase in price for this good affect your Total Revenue? Using specific examples, relates the concepts of Cross Elasticity and income elasticity to this product.

 

Sample Answer

Demand, Supply, and Market Equilibrium

As the law of demand clearly states, as the price of a product decreases, its quantity demanded increases, and as its price increases, its quantity demanded decreases. This is true considering determinants of demand such as consumer preference, income, and expectation remain constant.

In Figure 1 above the quantity demanded and price are inversely related so that more of Cheerios cereal are bought as its price decreases and less of it bought as its price increase. Note here that price is an obstacle that discourages consumers from buying more of the Cheerios cereal product.

However, changes in the other demand determinants will either shift the demand curve to the right or to the left depending on the impact of determinant. For example if most consumers prefer Cheerios cereal, its demand will increase with decreasing price and therefore the curve will shift to the right.

Supply on the other hand shows the amount of product that a producer is willing to offer for sale at a given price during a specific period of time. Price and quantity supplied are directly related meaning producers will offer more of product for sale as its prices increases and less of it as its prices falls. This is explains the law of supply. The higher the price of Cheerios cereal, the greater its incentive and the greater the quantity supplied. Other determinants like expectations associated with price increase may stimulate suppliers to produce more of a product, causing current supply to increase. This will shift the supply curve to the right.

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