Microeconomics: Demand, Supply, and Real-World Examples

This essay delves into the fundamental microeconomic theories of demand and supply, exploring the inverse relationship between price and demand, and the direct relationship between price and supply. It uses real-world examples, such as the growth in air traffic due to reduced prices and the sustained demand for iPhones despite high costs, to illustrate these principles. The essay also addresses exceptions to these theories, including the Veblen effect and situations involving future price expectations and perishable goods, which can lead to upward-sloping demand curves and downward-sloping supply curves. The analysis emphasizes the importance of understanding these theories for businesses to effectively determine pricing and supply strategies for optimal market performance. This resource is available on Desklib, offering students access to a wealth of solved assignments and past papers.

Running head: DIPLOMA OF BUSINESS ADMINISTRATION
Diploma of Business Administration
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1DIPLOMA OF BUSINESS ADMINISTRATION
Introduction
One of the key and basic theories being used in the microeconomics is the theory of
demand and supply. This is due to the reason that, these theories states the key economic factors
that determines the demand and supply of commodities in the market. However, there are various
exceptions also with these theories. This essay will discuss about the about the concepts of
demand and supply by analyzing two related articles along with discussing the exceptions to this
theories.
Theory of demand
According to the theory of demand, there is an inverse relationship between the price and
the demand of the commodities. Thus, with the increase in the price, demand for the
commodities get decreased and vice versa. This is due to the reason that, with the increase in the
price of the products, purchasing power of the consumers gets reduced.

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Figure: 1
Demand curve
According to the above demand curve, when the prices of the product get reduced from
80 to 60, quantity demanded by the consumers gets increased from 300 to 500. Thus, the point of
intersection changes from ‘A’ to ‘B’. Due to this reason, demand curve is always downward
sloping. According to (Forbes, 2017), there is a significant growth seen in the air traffic in the
last few years due to the reason of reduction in the price of air travel. Thus, according to the
theory of demand, with the reduction in the price of the air travel, the demand got increased.
Exceptions of demand theory
There are various exceptions of the theory of demand, where price and quantity
demanded goes in same direction. One of the exceptions is the Veblen effect. According to this
concept, in the case of the luxurious items, people tend to buy more of it when the price increases
further. This is due to the reason that, when the price increases, it owns some exclusive value and
vice versa. Thus, people tend to buy more of those in order to enhance their prestige value in the
society.

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Figure: 2
Upward sloping demand curve
Another determinant that creates upward sloping demand curve is the income of the
customers. If the income of the customers gets increased with the increase in the price of the
products, then customers will not reduce the consumption and thus create the upward sloping
demand curve. The above diagram is showing that, with the increase in the price of the product
from P1 to P2, quantity demanded increased from X1 to X2. Thus, with the increase in the price
of the product, demand also got increased. According to (Popomaronis, 2017), sales of iphone x
will not be affected regardless of its exorbitant price. According to the article, Apple iphone not
only provide technological features but also attitude, social class and prestige. Thus, the more
premium will be the pricing of iphones, the more will be their appeal to the customers. This is
one of the prime examples of exception to the theory of demand.

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Theory of supply
According to the theory of supply, price and quantity supplied of the products flows in
the same directions. This is due to the reason that, the more will be the price of the products in
the market, the more will be the motivation of the suppliers to supply products in the market to
gain more and vice versa. Thus, both the price and quantity supplied flows in same direction.
Figure: 3
Supply curve
The above diagram shows the upward sloping supply curve. In the above figure, it is seen
that, with the increase in the price of the products from 60 to 80, the quantity supplied got
increased from 500 to 700. Thus, with the increase in the price of the product, quantity supplied
also got increased. Thus, supply curve remains upward sloping.

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Exceptions to the theory of supply
Similar to the law of demand, theory of supply is also having some exceptions, which
caused downward sloping supply curve. One of the key determinants is the future trend. If the
suppliers expect that, the price of the product will get further reduced in the future, then they will
supply more in the current phase even in the lower price. Thus, the law of supply will not work
in this case. In the case of the perishable goods also, law of supply not works. This is due to the
reason that, perishable goods should be sold by the suppliers regardless of its lower price due to
the fact that it will perish after a point of time. Thus, in all these cases, the supply curve will be
downward sloping.
Conclusion
Thus from the above discussion, it is being concluded that, theory of both demand and
supply is important for the business organizations. This is due to the reason that, effective
determination of the price and market will help them to supply and maintain the price
accordingly in order to gain maximum output. Moreover, various exceptions to the law of
demand and supply are also discussed in this essay.

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Reference
Forbes. (2017). Forbes.com. Retrieved 29 November 2017, from
https://www.forbes.com/sites/greatspeculations/2016/08/30/what-are-the-factors-behind-
soaring-air-travel-growth/2/#4a440433213f
Popomaronis, T. (2017). The iPhone 8 Will Still Shatter Demand Records Despite Its High
Price--Here Are 3 Reasons Why. Inc.com. Retrieved 29 November 2017, from
https://www.inc.com/tom-popomaronis/3-reasons-the-iphone-8-will-result-in-historic-
dem.html