Supply and demand
There are main causes to changes in demand and supply of goods and services, especially demand of houses. The following factors are said to have impact on the quantity supplied and demanded (Mankiw, 2008, p. 99).
Changes in disposable income this product will be affected if there is a change in disposable income of the consumers. If disposable income for consumers decreases, especially in the period of economic downturn, we mean that the consumers will have less to spend and thus they will buy the houses that are cheap. In this case, they will move to those houses that are cheaper. This will mean that the demand will fall, as well as the quantity demanded. However, if the price is changed downward, to the level of substitutes then the demand will remain with little effect.
Loans and mortgages - unlike ordinary product, houses will be affected by the loans and mortgages. If there will be no loans and mortgages then the house demand will be lower. Thus loans and mortgages play an important role in ensuring that the house is purchased.
Consumer behavior - Apart from loans and mortgages, consumer behavior, such as the needs of the consumer as well as what the consumer wants from the houses will ensure that the product will be purchased. If the consumer creates a negative attitude towards the house, the consumer will move to the houses in another estate and this will ensure that the demand curve takes the following format.
The quantity will continue coming down if the price remains the same. Assume the income came down and quantity demanded reduced from Q to Q1. And the price remained the same. It is a clear that the changes in the demand were not due to price changes but were due to income levels changes.
Diagram 1
Coming back to demand factors, it is possible to distinguish between individual modifying demand factors , such as the physical characteristics of the individual customer, individual consumer, individual reactions to sensory perceptions, individuals ethical and moral values and conceptions, intellectual capacities and general individual motivations.
Social demand factors derive from the fact that consumer units live in a particular social environment and react to influences and stimuli emanating from the actions of other persons or groups, irrespective of whether they are members of a family, a particular group, a wider community or even the nation as a whole. The economic position of consumers as well as the legal socio-cultural factors can influence consumer behavior. Interpersonal and group influences in turn mainly derive from the following phenomena the basis needs of human beings for achievement the need to feel equal, the need to show off and demonstration (McTaggart, Finlay and Parkin, 2003, p. 77).
Economic demand factors include disposable income relative prices at any point in time the influence of advertising on consumer behavior, consumer credit facilities and certain technological and economic developments. Amongst these factors, purchasing power is of primary importance. The conscious concrete needs of consumer units can exist regardless of the variety of factors which create and modify such needs, they can only be converted into effective demand when they are supported by this factor, namely purchasing power. Purchasing power is a conditioning and provisory factor in effective consumption and business success. The causative factors in a specific expenditure pattern must however be sought elsewhere, namely in the dynamics of the community and especially in the group context of both the consumer and the entrepreneur (McTaggart, Finlay and Parkin, 2003, p. 77).
Having discussed the variables that impact consumer demand for the medical product, it is important to look at access and supply. When the supply for the medical product is changed, the demand also changes. Supply may change due to increased production and access of the product to the people involved (McTaggart, Finlay and Parkin, 2003, p. 76).
Effects of Shifts in Supply and Demand on Decision Making
Diagram 2 helps explain this. With the increase in the disposable people will have more money and the aggregate demand (AD) will rise the AD curve shifts to the right (from AD to AD). This will force suppliers of houses to raise prices or run out of the product. Contractors will face the same problem, they have either to raise prices or suffer shortages since they do not have the capacity to increase the number of houses at the same price without a simultaneous adjustment in labor cost. The reverse is true actually, with increase in money in the market labor, other input costs rise and the aggregate supply (AS) curve shifts to the right and upwards. The result is inflation. Notice the marginal increase in quantity with substantial increase in prices.
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Diagram 2
Application of Supply and Demand from the Simulation in Workplace
The demand and supply theory is used in my workplace to determine the pricing of our products.
Effects of Price Elasticity of Demand on Decision Making of the Consumer
Price elasticity of demand measures the response of demand price changes, so elasticity is brought about by the change in demand. If a change of price causes a less than proportionate change in demand then demand is elastic. Price elasticity of demand will influence the consumer to purchase the product or change to substitute product (Mankiw, 2008, p. 100).
Effects of Income Elasticity of Demand on Decision Making of an Organization
Income elasticity of demand is vital because it will help an organization to know what price to charge for their product and how the quantities will be affected. For example, if a slight change in price results in a large change in sales, then the demand for the product is said to be elastic (McTaggart, Finlay and Parkin, 2003, p. 79).
Also, if the demand is elastic, an organization will not want to raise the price of its product because any increase in price will result in serious decrease in the quantity sold. On the other hand, if a change in price results in very little change in quantities sold, the demand for the product in question is said to be inelastic. This means price may be changed without affecting quantity demanded (Mankiw, 2008, p. 101).
Effects of Cross-Price Elasticity of Demand on the Decision Making of an Organization
The cross-price elasticity of demand determines the price adjustments to meet competition in the market. The organizations can change cost of production in order to catch with competition. Through changing the techniques of production, technical improvements such as the invention of a new machine or the development of a new method of production may make possible a big expansion of output at lower cost and as a result increase supply. They will also bring changes in the sources of raw materials and their prices will go down.