Effect of Demand and Supply on Market Equilibrium

This assignment delves into the world of microeconomics, focusing on the essential factors that influence market equilibrium - demand and supply. The document examines how changes in either demand or supply affect the equilibrium price and quantity of a commodity. It also discusses the importance of considering both sides (demand and supply) when analyzing the dynamics of a market. The assignment draws from various sources, including academic journals and books, to provide a comprehensive understanding of this crucial economic concept.

Economics for business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Demand of the product is the quantity demanded by the consumer at a given price level.
Whereas supply of a commodity is the quantity supplied by the supplier at a given price. With
the change in the price there is a change in the demand of the commodity. Also with the increase
or decrease of the supply quantity there is a change in the price of the quantity supplied. Demand
and supply are the two main forces which determines and effects the price and quantity of the
commodity. This report contains the shift in the demand curve by the change in the demand and
its effect. Also the rightward and leftward movement of the supply curve and its effect on the
price and quantity demanded. Thereafter it includes the equilibrium and the determination of the
equilibrium price and quantity demanded of the company Polo Mints in UK. The various effects
on the equilibrium price and equilibrium quantity demanded by the increase and decrease of
demand and supply.
MAIN BODY
Demand of a commodity is the quantity of goods which a consumer is ready to buy at a
given price. The demand of a commodity have inverse relationship between the price of the
commodity and the quantity demanded by the customers, so when the price rises there will be
decrease in the quantity demanded by the customers. Supply of a commodity is the quantity
supplied by the supplier on the specified price. There is positive relation between the price and
quantity supplied thus when there is increase in the price of commodity there will be increase in
quantity supplied(Armstrong, 2016).
Shift in demand
There is a shift in demand when the demand curve shift rightward or leftward when price
being constant and there are other underlying factors which results in the increase or decrease of
the demand which shifts the demand curve.
Increase in demand-
When there is increase in demand than the demand curve shifts to the rightward. This
increase in demand is caused by the factors like taste and preferences of the customers, the
climatic conditions and the price of other substitute goods. When there is shift in demand the
price remains constant in the company Polo Mints UK(Buckley, 2016). In illustration 1 D1 is the
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increase in the demand and Q1 is the quantity demanded. And P is the price which is constant
when the demand changes.
Decrease in demand-
There is leftward shift in the demand curve when there is decrease in demand. The
decrease in demand is caused by the substitutes goods, goods of perishable nature, income of the
customer. There is decrease in demand when the income of the consumer falls and he tends to
buy less product thus decreasing the demand and causing the shift in the demand curve(Cook,
2017). In illustration 1 D2 is the decrease in demand and Q2 is the quantity demanded on the
demand of D2 where the price remains the same.
Illu
stration 1: Increase and decrease
in demand
(Source: Changes in Market
Equilibrium: Impact of Increase
and Decrease,2019)
Shift in Supply
There is a shift in supply curve when the supply of product increases or decreases which
causes rightward or leftward shift in the supply curve. This shift in the supply curve is due to
several external factors and price remains constant.
Increase in supply-
When there is increase in supply through the various external factors there is rightward
shift in the supply curve where price remaining constant and there is no change in the price of the
commodity. These changes can be due to factors like technological changes, change in
government policies and climatic conditions. When there is inducement of new technological
changes there will be increase in supply of the commodity and the price remaining the same as
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there is the same cost of production there will be rightward shift in the demand curve.in the
illustration 2, S1 is the increase in the supply and Q3 denotes the increased quantity spplied.
Where P is the price which remains constant(Karunanithi and et.al., 2017).
Decrease in supply-
When there is decrease in supply by the various factors and the price remaining constant ,
there is shift in the supply curve leftward. The shift of the supply curve leftward can be due to
government policies like inducement of the taxes. With the increase in taxes there will be
increase cost of production and taxes will add to the cost thereby increasing the cost of the
commodity to the seller therefore there will be decrease in supply of the commodity at the same
price level in Polo Mints UK. Here in illustration 2 S2 is the decrease in the supply of
commodity and Q1 is the change in the quantity supplied price remaining the same(Mulhearn
and Vane, 2015).
Illustration 2: Increase and decrease in
supply
(Source:Movement along a Supply Curve
and Shifts in Supply Curve,2018)
Changes in the demand and supply and there effect on the equilibrium quantity and the
equilibrium price of a commodity.
Equilibrium refers to the stage where demand and supply curve cuts each other at
common point , which means supplier is producing goods equal to goods demanded by
consumer or the word equilibrium means balance where there is no excess supply or demand that
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reflects optimum utilization of resources .Factors that leads to change in demand are price of
own goods- If there will increase in the price of a commodity then there will a decrease in its
demand similarly if there is decrease in price of the commodity then there will be an increase in
its demand, as there is an inverse relationship between demand and its own price.
Price of other goods, Other goods can be substitute goods and complementary goods.
Substitute goods can be tea and coffee .increase in price of tea will lead to increase in demand of
coffee similarly decrease in price of tea will lead to decrease in demand of coffee on the other
hand complementary goods can be car and petrol(Armstrong, 2016). An increase in price of
petrol will lead to decrease in demand of car on the other hand decrease in price of petrol will
lead to increase in demand. Income level has positive effect on demand of goods , if there will be
increase in income of a consumer then there will be an increase in demand of a commodity on
the other hand if there is an decrease in income level of a consumer then there will be decrease in
demand for the same product. Price expectation,If it is expected by the consumer that price of a
product in future can be increased then it will increase the present demand for the product.
Similarly, if consumer is expecting that future price will decrease then present demand will also
decrease with the same(Buckley, 2016).
Factors that leads to change supply are technology, If a supplier is using new technology
and method of doing work then it will decrease wastage and cost of production ultimately
supplier will be willing to sell more commodities at lower costs .On the other hand if new
technology is not properly used by supplier then it will lead to increase in cost of production and
increase in wastage ultimately it will lead to decrease in supplier because of lower productivity.
Size and no. of the firm, large scale of business will obviously produce large no. of products and
here supply will be more and small scale business will produce less no. of products where supply
will be less. Similarly, if there are more no. of firms producing similar products in the market
then supply will be high and less no. of firms means less supply of the product(Karunanithi and
et.al., 2017). Government policy, Government impose policies like import restriction to increase
custom duties and taxes to restrict the entry of imported products for increasing the supply of
domestic goods . On the other hand it increases tax on goods so to decrease supply of domestic
producers.
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At the point of equilibrium the demand and supply intersects and the equilibrium price
and equilibrium quantity is determined. The demand and supply changes have a wider effect on
the equilibrium quantity and the equilibrium price of the commodity. The change in demand and
supply is due to several reasons which can be external or internal factors like technological
changes, legal factors, environmental factors and change in the policies of the company Polo
Mints UK(Rao, 2016).
The there can be shift in the demand curve without the change in the supply of the commodity .
Also there can be change in the supply curve without the change in the demand curve. Both the
factors can effect the equilibrium prices and equilibrium quantity of Polo Mints. Demand- supply
analysis is an important tool in determining the equilibrium price and the equilibrium quantity
and help in analysing the change in price and quantity by the change in the demand and supply
individually and simultaneously in the market.
When there is change in demand curve being the supply curve constant. If the demand for
the commodity rises due to several factors and the price remaining the same there will be
increase in the equilibrium prise and the equilibrium quantity demanded but the supply of the
commodity remains constant(Sarker, Ortega-Vazquez and Kirschen, 2015). For example- the
increase in income of the consumer will increase its purchasing power for a specified commodity
there by increasing the demand for the product, in this case supply of commodity will remain
same as the market will offer the same quantity of the product in the market. The function of this
will increase the equilibrium price of the commodity and also the equilibrium quantity of that
commodity in Polo Mints UK. Apart from increase in the income of the consumer there can be
favourable change in the taste and preferences of the customer, there can be rise in price of the
commodity and the goods for which price can raise in near future. In illustration 3, D1 is the new
demand and P1 and Q1 is the new price and quantity demanded by the consumer(Xu, and Low,
2016).
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Illustration 3: Increase in demand
(Source: Changes in Market Equilibrium:
Impact of Increase and Decrease,2019)
When the demand for the commodity decreases there will be shift in the demand of the
commodity and with the change in the demand curve to there is a change in the equilibrium
quantity and the equilibrium price of the commodity . When the demand of a product decreases
there is leftward shift in the demand curve. As a result the equilibrium price and the equilibrium
quantity decreases in Polo Mints . There can be goods to those demand decreases like demand
for ice cream will decrease in the winter and the supply remaining the same(Armstrong, 2016).
With the decrease in demand there will be decrease in the equilibrium quantity and the
equilibrium price of the commodity. The ice cream will less likely be consumed by the
customers in the winter season. The demand for a commodity can also decrease if there is
expectation of the fall in price in near future. Also if the price of the substitute goods decreases
there will be decrease in the demand of the commodity. In illustration 4, D2 is the decrease in the
demand and P2 and Q2 denotes the price and quantity demanded.
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Illustration 4: Decrease in demand
(Source:Changes in Market
Equilibrium: Impact of Increase and
Decrease,2019)
At times there can be change in the supply of the commodity. This change can be due to
several reasons like change in the government policies, change in the taxes, the technological
advancement. The change in supply results in the shift of the supply curve both in the rightward
and leftward direction(Buckley, 2016). There can be increase and decrease of the supply and the
demand remaining the same for that commodity. The shift in the supply curve results in the
change in the equilibrium quantity and the equilibrium price of a commodity.
As the supply of a commodity increases there is shift of the supply curve in the rightward
direction. This rightward shift in the commodity results in the increase in the of the equilibrium
quantity and the deduction in the price of commodity. Whereas there is no change in the quantity
demanded in the market. The shift in supply can occur due to new technological advancement
where there is improved methods of the production there can be greater quantity of the goods
produced and thereby more supply of the goods by the company at the same price(Cook, 2017).
Therefore demand remaining the same there will be increase in the quantity demanded and the
reduction in the price of the equilibrium price. There are other reasons too that can increase the
supply of the commodity are reduction in the price of the factors and reduction in the excise duty
for the product.
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Illustration 5: Increase in supply
(Source:Changes in Market
Equilibrium: Impact of Increase and
Decrease,2019)
There can be decrease in the supply of the commodity which can cause the supply curve
to shift leftward and the demand remaining constant by the customer. There will be decrease in
the equilibrium quantity and the increase in the equilibrium price of that commodity. The
decrease in supply can be by several reasons like increase in the price of factors of that
commodity, coming of new product in the market(Karunanithi and et.al., 2017). For example
there is strike in the market to not deliver the labour service, therefore the labour available will
be at higher rate which will increase the cost of labour and thereby decreasing the supply of
commodity in the market.
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Illustration 6: Decrease in supply
(Source:Changes in Market
Equilibrium: Impact of Increase and
Decrease,2019)
CONCLUSION
From the above study there are factors which effect the demand and supply of the
commodity. With the increase in the price of the commodity there is decrease in the quantity
demanded by the consumers and vice versa. Also with the increase in the price of the commodity
there is increase in the quantity supplied by the supplier. The equilibrium is the point where the
demand and the supply curve meets and that price is equilibrium price and the quantity is
equilibrium quantity of the company Polo Mints in UK. There is shift in the demand and supply
curve. This shift is in rightward and leftward directions which effects the price and quantity of
the commodity. Thus the shift of the demand and supply curve results in the change in the
equilibrium quantity and the equilibrium price of the commodity. Therefore demand and supply
are the important factors which effect the price of the product.
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REFERENCES
Books and Journals
Armstrong, T. B., 2016. Large market asymptotics for differentiated product demand estimators
with economic models of supply. Econometrica. 84(5). pp.1961-1980.
Buckley, P. J., 2016. International business: economics and anthropology, theory and method.
Springer.
Cook, P. J., 2017. The demand and supply of criminal opportunities. In Crime Opportunity
Theories (pp. 127-153). Routledge.
Karunanithi, K. and et.al., 2017. Integration of demand and supply side management strategies in
generation expansion planning. Renewable and Sustainable Energy Reviews.73. pp.966-
982.
Mulhearn, C. and Vane, H., 2015. Economics for business. Macmillan International Higher
Education.
Rao, B. B. ed., 2016. Aggregate demand and supply: a critique of orthodox macroeconomic
modelling. Springer.
Sarker, M. R., Ortega-Vazquez, M. A. and Kirschen, D. S., 2015. Optimal coordination and
scheduling of demand response via monetary incentives. IEEE Transactions on Smart
Grid. 6(3). pp.1341-1352.
Xu, Y., Li, N. and Low, S. H., 2016. Demand response with capacity constrained supply function
bidding. IEEE Transactions on Power Systems. 31(2). pp.1377-1394.
ONLINE-
Changes in Market Equilibrium: Impact of Increase and Decrease.2019.[online]. Available
through <http://www.yourarticlelibrary.com/economics/market/changes-in-market-
equilibrium-impact-of-increase-and-decrease/37161>
Movement along a Supply Curve and Shifts in Supply Curve.2018.[online]. Available through
<https://www.businesstopia.net/economics/micro/supply-curve-movement-shift>
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