Demand and Supply Analysis in Contemporary Business Economics

This report analyzes the concepts of economics to evaluate their impact on market behavior and decision-making. It discusses demand and supply analysis in micro-economics and explores the emerging theories and models in 21st century contemporary economics.

Contemporary Business
Economics
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Demand Analysis..................................................................................................................3
1.2 Supply Analysis....................................................................................................................5
Task 2...............................................................................................................................................8
Emerging theories and models in 21st century contemporary economics..................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
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Introduction
Demand and supply analysis are two fundamental forces of the economics and helps
determine dynamics of market behaviour. Further, these determinants are derived from consumer
behaviour and leads to changes in modern business practices (Amankwah-Amoah and Wang,
2019). This report aims to analyse concepts of economics to evaluate their impact on the market
behaviour and the decision-making of the consumers and businesses. In the first part of the
report, micro-economical determinants of demand and supply are discussed on a business. In the
second part of the report, contemporary economic theory of behavioural economics is discussed.
Task 1
1.1 Demand Analysis
Economic studies in micro-economical perspective studies two forces of market that are
allowed free flow of interaction to achieve an equilibrium in the market. One such force of
market is demand. In micro-economics, quantity demanded refers to the demand of any
economic commodity by consumers at a specific price in a specific nature of market. This
demand by customers must be backed by willingness and purchasing abilities. Quantity
demanded and price are the two most important determinants of demand analysis.
Law of demand
Under the conditions of other factors being constant (ceterus peribus), it is stated that
price of the product and quantity demanded behave in an opposite manner. In other words, law of
demand states that when price of the product increases, quantity demanded of that product or
service decreases and when price of the product decreases, quantity demanded of that product or
services increases. This inverse relationship of price and quantity demanded is depicted by the
demand curve. Owing to the inverse relationship of the two factors, demand curve shows a
negative slope. Most of the commodities exhibit the same relationship but there are some
exceptions to the law of demand. These exceptions include Veblen goods, expectations of future
changes in prices, necessary goods, luxury goods and income change. In these situations,
demand of the products do exhibit positive relationship with the prices (Anđelković, 2016).
Responsiveness of demand to its determinants is known as elasticity of demand.
Determinants impacting elasticity of product can be its price which is known as price elasticity
of demand or any other factor such as income elasticity of the demand or cross elasticity of the
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demand. Cross elasticity of a product refers to the change in prices of demand of a product due to
its substitute or complementary products. Substitute products are those products which can be
used as an alternative of the mentioned product such as tea is substitute product for coffee.
Complementary products are those products whose demand complement each other such as pen
and ink.
Movement along the same demand curve
Illustration 1: Movement along demand curve,
2021
Demand curve is the graphical representation of the relationship between prices and
corresponding quantity demanded of the product or service (Barr and et. al., 2018). As prices
increase, quantity demanded decreases which is known as contraction of demand and when
prices decrease, quantity demanded increases which is known as expansion of demand. Since,
price of a commodity is the basic factor deriving its demand curve, expansion and contraction in
demand cause movement along demand curve. For example, there is an increase in the price of
coffee. Coffee being an elastic product, saw a slump in demand. As a result of contracted
demand, demand moved leftwards on the same curve. In case of decrease in price of the coffee,
demand will show an opposite result and as a result of the expanded demand, demand moved
towards rightwards on the same curve.
Change in demand curve
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Illustration 2: Shift in demand curve, 2021
Other than price, there are various determinants that impact upon the demand of a
commodity (Woodside, 2016). In the practical conditions, no factors of demand are constant.
However, in order to understand the conceptual changes, it is assumed that only one factor of
demand changes at a time. These factors impact the demand of a commodity such as in case of
change in prices of substitute products, there is highly likely chances that demand of mentioned
product would increase at the same price. For example, there is an increase in the prices of tea.
As a result, its demand decreased and people switched over to coffee, increasing its demand at
the same price. This change in demand due to factors other than price will lead demand curve to
leave its position and shifts towards right. On the contrary, if the prices of tea had declined, there
would be shifts of consumers over there as tea being the substitute product of coffee. It will lead
to decline in demand of the coffee. This decline in demand would force demand curve to shift
towards left. Other than changes in prices of the substitute or complementary goods, there are
various others factors that impact demand of a commodity and lead to left or right shift in its
demand curve. These factors include change in fashion, change in income, seasonal demand, etc.
(Black, 2019)
1.2 Supply Analysis
Other than demand, supply is another force of market that is allowed free flow of
interaction to achieve an equilibrium in the market. In micro-economics, quantity supplied refers
to the supply of any economic commodity by a seller at a specific price in a specific nature of
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market. This supply by seller must be backed by willingness to sell. Quantity supplied and price
are the two most important determinants of supply analysis.
Law of supply
Under the conditions of other factors being constant (ceterus peribus), it is stated that
price of the product and quantity supplied behave in same manner. In other words, law of supply
states that when price of the product increases, quantity supplied of that product or service
increases and when price of the product decreases, quantity supplied of that product or services
decreases. This direct relationship of price and quantity supplied is depicted by the supply curve.
Owing to the direct relationship of the two factors, supply curve shows a positive slope. Most of
the commodities exhibit the same relationship but there are some exceptions to the law of supply.
These exceptions are related to market and businesses such as competition in the market, goods
being supplied is of perishable nature, artistic or auctioned goods, legislative restriction, etc.
Responsiveness of supply to its determinants is known as elasticity of supply. Determinants
impacting elasticity of product can be its price which is known as price elasticity of supply
(Flash and et. al., 2020).
Movement along the same supply curve
Illustration 3: Movement along supply curve, 2021
Supply curve is the graphical representation of the relationship between prices and
corresponding quantity supplied of the product or service. As prices increases, quantity supplied
increases which is known as expansion of quantity supplied and when prices decreases, quantity
supplied decreases which is known as contraction of demand (Grima, Özen and Boz, 2020).
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Since, price of a commodity is the basic factor deriving its supply curve, expansion and
contraction in supply causes movement along supply curve. For example, coffee is a fast moving
consumer good whose market is perfect competition. Individual firm in the market is price taker.
Suppose, there is an increase in the price of coffee. Seeing the opportunities of earning higher
revenues, sellers increased the supply of the coffee. As a result of extended supply, supply
moved rightwards on the same curve. In case of increase in price of the coffee, supply will show
an opposite result and as a result of the contracted supply, supply moves towards leftwards on
the same curve (Smorto and Vinci, 2020).
Changes in supply curve
Other than price, there are various determinants that impact upon the supply of a
commodity (Hassan and Basit, 2018)(Hossain and et. al., 2018). In the practical conditions, no
factors of supply are constant. However, in order to understand the conceptual changes, it is
assumed that only one factor of supply changes at a time. These factors impact the supply of a
commodity such as in case of decrease in cost of production, there is highly likely chances that
supply of mentioned product would increase at the same price. For example, there is a decline in
prices of cocoa beans. As a result, cost price of coffee decreased and the sellers got strengthened
to supply more coffee at the same price. This change in supply due to factors other than price
will lead supply curve to leave its position and shifts towards right. On the contrary, if there is an
increase in prices of cocoa beans, cost price of coffee would increase and to not lose customers
in perfect competition, sellers were to supply coffee at the same price and to avoid more loss,
they will decline level of supply of the coffee. This decline in supply would force supply curve to
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Illustration 4: Shift in supply curve, 2021

shift towards left. Other than changes in prices of raw materials, there are various others factors
that impact supply of a commodity and lead to left or right shift in its supply curve. These factors
include change in number of firms in the market, change in investment capacity of the seller,
profitability of the alternative products, change in supply of related products - substitute and
complementary products, change in productivity of the workers, change in technology, change in
taxes and subsidies, etc. (Horne, 2017)
Task 2
Emerging theories and models in 21st century contemporary economics
Economics earlier was known as the study of procurement and allocation of scarce
resources in the practical business environment. These practices kept on evolving and became
the centre of discussion of various practitioners which lead to development of various
applications and streams of economics. One such theory is behavioural economics which
combines economic studies with psychology to assess the decision-making process of the
individuals and businesses. It came into discussion in 20th century and gradually evolved in 21st
century till date.
Behavioural economics is normative economics and aims to reflect ideological or
normative judgement to the practices that led to economic development. It takes into perspective
economic decision-making from both micro-economical and macro-economical point of view. It
originated as a contradiction to the rational choice theory which was heavily taken as the basis in
economic discussion in 20th century. Rational choice theory is the assumption of the economists
that believe the consumers are rational and make only such decisions which is able to provide
them optimum satisfaction. As a contradiction, behavioural economic theory believes that
consumers not always make rational decision (Klarin, 2018). These irrational decisions can be
owed to either limited knowledge of consumer or due to any obstruction in the path of decision-
making. Various concepts related to the behavioural economics are discussed below:
Prospect Theory
As discussed earlier, 20th century economic theories revolve around rational choice
assumption of the consumers' decision-making. It was a belief that consumers only take
decisions which add value to them as they are aware of their exact needs and wants. Prospect
theory as propounded by Amos Tversky and Daniel Kahneman asserted the contradiction. They
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asserted that consumer decision-making is possible of not being a ideal decision and can be
influenced by factors such as opportunity cost. This theory deals with the possible biases that
affect the certainty and deals with factors that leads to isolation effect and loss aversion. It says
that it is subjected to risk capabilities of the consumers and that consumers find it more difficult
to handle pain of giving up something that they have chances to have than the pleasure they
derive of receiving it. This theory explains these assumptions by a lottery game. This game gave
two choices to individuals wherein one had the two alternatives to gain something and other had
two alternatives that stands for loss. In the results, it was determined that consumers, in case of
gain, choose alternative that is riskless as they are eager to avoid risk while in the case of loss,
they choose alternative which involves risks as it has hope of avoiding risks. Thus, it was
suggested to businesses that they develop and place their products accordingly in the minds of
consumers to achieve success (Krpalek, Krelova and Berkova, 2018).
Bounded Rationality
This is one step forward of Prospect theory and was propounded by Herbert Simon. This
theory discusses that bias and limiting factors that bound rational decision-making capabilities of
consumers. It asserted that there are mainly three such factors that limit rationality which
includes cognitive ability, imperfect conditions and time constraints. It comes from the
assumption which believes that one of the inducing factors that limit rational decision-making is
time and situations that are present around the person who is to take a decision. It believes that
consumer decision-making is based on limited knowledge and computational abilities. People try
taking shortcuts and these shortcuts leads to sub-standard decisions which may not be good for
economy as a whole and business practices in micro-environmental practices. Therefore, it is
very important for businesses to identify those limiting factors that consumers might come across
while taking their products. These ideas were carried forwarded by two theories - nudge theory
and heuristics.
Nudge Theory
It was propounded by Cass Sustein and Richard Thaler. Nudge refers to any factor that is
capable of influencing consumer behaviour in a predictable manner. Alternatives in the present
options and incentives attached to them should be disregard of the nudge factors being
considered (Kulhánek and Sulich, 2018). Nudge factors should not be expensive and the required
intervention should not be taken as mandate. This theory is very helpful to modern business
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practices as it inspires businesses to identify nudge factors that are capable of stimulating
demand of their products or services among the minds of the consumers. It is helpful in
determining such course of actions which are capable of influencing consumer decision-making
process of both types of consumers i.e. those who need special customised nudge or otherwise.
For example, concept of up-sell used by restaurants or product placement concept that aims to
place a product in the minds of the consumer as a default option (Milne and Parboteeah, 2016).
Heuristics Theory
Heuristics refers to the thumb rules. In other words, these are those behavioural shortcuts
that influences consumer decision-making process in the case of uncertainties in the mind. It
inspires the process of mental accounting. It was propounded by Gerd Gigerenzer who believed
that human mind is subjective to the surrounding environment. It helps in developing different
alternatives to the uncertain questions. However, these alternatives can be contradictory from the
nature of cognitive biases and rationality. Search heuristics was suggested in this theory which
assesses the reason behind choosing a particular alternative. It then suggests businesses to
determine those reasons as these reasons will lead them to persuade consumers to buy their
products. It helps them develop a vocabulary of best practices that are capable of making rational
decisions related to consumers, sales and demand (Shekhar and et. al., 2020).
Conclusion
Above report explores micro-economical determinants of demand and supply as well as
concepts of behavioural economics with a view to assess factors that influences consumer
decision-making. Identifying such decisions helps modern business practices in determining
cognitive applications that are capable of influencing economic decision-making and
psychology. Demand and supply law were discussed above to identify and assess those factors
which influences market forces to move along their curve such as price as well as those factors
which are capable of shifting their curves to left or right. These factors are determinants other
than price.
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Movement along supply curve. 2021. [Online]. Available
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