Microeconomics
Supply and Demand
In the economics study, demand and supply are schedules or arrays of price and quantity combinations (Zkreso, 2008). Demand and supply concept is actually the basic foundation of economic theory and thought. The very reason for the existence of a firm is the demand for its product that it produces to sell according to the article in the Transtutors.com. The economic meaning of the term demand is hence the relationship between the price of the product and the quantity of the product the consumers will be willing and able to buy at various prices, holding all other factors constant. While the demand for the product comes from the consumers, however, it is the firm that decides how much of the product to produce and supply in the market. Accordingly, the supply of a product is the relation between the price of the product and the total quantity of the product that producers are willing and able to offer at various prices, keeping all other factors affecting supply decisions constant. Supply represents the quantity of goods or services available for sale while demand represents the number of consumers who need the goods or service and want to buy. The price at which the good is sold at is taken to be its cost plus profit. While a good is said to be something one can see, touch, feel, smell taste while a service is something you do to others, they need it, pay for it but is not tangible. A service is hence intangible.
The law of supply
In the cause of doing business, the supplier may increase the price or lower it. By raising the price, other things being unchanged, the demand will go down as more consumers will think twice before buying the good or service. In economics this is referred to as the law of supply.
The law of demand
When the price is lowered, other things being unchanged, more consumers will want to buy the good or service as they will consider this to be a deal and in this particular case the demand will be said go up. This in economics is known the law of demand.
Factors that lead to a change in supply and change in demand
Besides the price of the product, other factors that will influence supply according to Trnastutors.com include
1. Input cost and taxes- Increase in the input costs and imposition of taxes will make it costlier for the firm to produce a specific quantity of the product. To continue making the same amount of profit, the firm will have to increase prices or bring down the quantity produced.
2. Technology and government regulations- Improved technology or government policies conducive to the firm will improve production conditions.
3. Profitability of the substitutes in production- If cheaper substitutes for the inputs used in production can be utilized then the resulting effect will be similar to a decline in input costs.
4. Number of firms in the market- If the number of firms in the market increases, then the power of the existing firm to freely decide the quantity to supply is reduced. This will therefore influence the supply decisions taken by the firm.
5. Expectations- Firm management expectations regarding future prices, policies of the government and other factors play a key role. This will influence the supply decisions.
Apart from price changes, other factors that will influence demand are as follows
1. Consumer income- an increase in consumer income implies an increase in the ability of consumers to purchase more of all goods. Therefore demand for most goods increase when consumer income increases.
2. Prices of related goods- Changes in the prices of related goods lead to changes in demand. Related goods are of two kinds- substitutes and complimentary. A decrease in the price of a substitute good can cause the demand of the concerned good to decrease. Tea and coffee are substitutes as the consumer is likely to take tea if the price of coffee increases. A decrease in the price of a complementary good can cause demand of the concerned good to increase. For example a decrease in the price of bread is likely to increase the consumption of bread.
3. Consumer preferences- Consumers have preferences for particular brands of goods. These preferences can be changed in favor of a product with the help of advertising, sales promotions and so on.
4. Population- An increase in the population of consumers will increase demand for all products.
5. Seasonal factors- Seasonal factors also influence the demand for a product. Consumers purchase great deal of certain products during certain times of the year. For example, the demand for umbrellas is higher during the rainy season.
6. Expectations- If the consumers expectations about the price of a good in future changes, then the demand for the good will also change.
Trends in Consumption Patterns
The consumption pattern and the derived utility of the following products, tea, coffee and umbrellas will be discussed. Utility is said to be the satisfaction or the value an individual gets from the product he consumes. The utility that the consumer derives from the product will change according to the amount consumed and in most cases the utility will diminish as consumption increase. This pattern is referred to as diminishing marginal utility. While lowering the price for a cup of tea or coffee will increase the demand for tea or coffee, the utility that a consumer will get from consuming an extra cup of tea or coffee will progressively diminish. This reduction in satisfaction is commonly referred in economic as diminishing a marginal return that is for every cup of tea or coffee consumed, the satisfaction or need is reduced. As for the case of the umbrella, the utility derived from purchase of one umbrella is fully satisfied as an extra umbrella will not add any value in terms of consumption to the buyer. In other words, the marginal utility derived from purchasing an additional umbrella is basically zero.
However lower prices of tea or coffee will increase the demand for tea or coffee while the demand for the umbrella will diminish as the market tends to reach the saturation point.