Economics for Business: Demand, Supply, and Market Equilibrium

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Economics for Business
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Table of Contents
Introduction....................................................................................................................................3
Explain what equilibrium is using a supply and demand diagram...........................................4
Explain what leads to a change in demand.................................................................................6
Changes in supply..........................................................................................................................7
Effect on the prices due to changes in the supply.....................................................................10
Change in demand and supply on price....................................................................................11
Supply and demand diagram to depict the relationship with price........................................12
Conclusion....................................................................................................................................14
References.....................................................................................................................................15
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Introduction
The assessment is based on the economics of the business. The assessment is based the
basics of the economics. The demand and supply of the wine should be determined using the
equilibrium theory. The equilibrium is that point where the demand and supply curve meet
together. It shows the best combination of demand and supply of the wine. Equilibrium is
totally depends on the demand and supply of the product in the market. Demand of wine is
the quantity which the customer demands and supply is the quantity which the company is
able to supply in the market. Under the economics supply means the price at which quantity
is supplied in the market is known as supply. Demand under the economic is the quantity
demanded by the market at the particular price is known as demand.
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Explain what equilibrium is using a supply and demand diagram.
(Larondelle and Lauf2016)
The above example is based on the equilibrium of the English wine in the UK.
Equilibrium is basedon the demand and supply of the wine. Using the demand and supply
equilibrium can be achieved as it the point where demand and supply meet or intersect at the
point. The vertical axis shows the price of wine and horizontal axis shows the quantity of the
wine. The graph shows the demand and supply of the wine. S is the supply curve and D is the
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demand curve and the point where equilibrium is obtained is denoted with E. Above the
equilibrium point it shows excess of supply over the demand and below the equilibrium demand
is more than supply in the market (Cook 2017).
The above graph shows the equilibrium price of $1.40 and the equilibrium quantity is 600. It
means that if the price is $1.4 equilibrium can be achieved. The above table shows that if price is
$1.00 then the quantity demanded should be more as compare to quantity supplied because at
low price customer have more purchasing power. It means that if price is $1.00 then quantity
demanded is 800 and quantity supplied is 500. If price rises from $1.00 to $1.20 then the quantity
demanded will decrease and quantity supplied will increase as if price rises the company have
more chance to achieve more profit. At the next stage if the price raises more above the
equilibrium then it means that decrease in demand and more increase in the supply. Because if
price rises the customer in unwilling to buy the product it have low purchasing power so that.
Increase in supply of quantity is beneficial to the company as more price gives more profit
earning opportunities (Cook 2017).
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Explain what leads to a change in demand
Demand is that quantity which a customer is willing to buy at a given price. If the price gets
fluctuate then quantity demanded also gets changes because if price raise of the product in the
market then it effects more customer due to they have low purchasing power and if price
decreases which means that they can fulfill their wants (Myerson 2018).
Factors affecting the demand
1. Income: - it is the most important factor that affects the demand of goods. Usually income
decides the purchasing power of the customer. The more income will increase more purchasing
power as the customer will try to fulfill their demands. This leads to change in the demand curve
and demand curve will shift upward and if the decrease in demand the demand curve will shift
downwards (Larondelle and Lauf2016).
2. Changes in the price of related goods: - The price of related goods changes then it will affect the
demand of the product as there are various substitute goods available in the market so that the
consumer will switch over to another product if that product is cheaper than the product which
the customer is willing to buy.
3. Taste and preference of the consumer: - it is very much affect the demand of the product in the
market. If the taste and preference of a product is much accepted by the consumers than the
demand of that product will increase and if the taste and preference is not accepted by the market
force then the demand will falls.
4. Consumers in the market: - the more increase in the market force result in increase in demand as
the customers are increased. Mostly it is based on the product as if product satisfies the needs of
consumer than it will attract more customers which result in increase in the demand of the
product (Larondelle and Lauf2016).
5. Price of the product: - it is the most important factor that effect the demand of the goods as if the
price of the product raises the demand will fall and if the price decreases then the demand of the
goods reduces. So price is the key factor in change in demand.
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Increase in demand leads to shift in the demand curve. As the demand curve always slops
downwards from left to right this is because if the price rises the demand will fall and if the price
falls demand increases. Increase in demand is possible when the price of the product decreases
and also if the income increases and price of related goods increases and the taste and
preferences are accepted by the customer (Larondelle and Lauf2016).
Decrease in demand implies the shift of demand curve toward downward as the customer is
unable to buy the product. Decrease in demand curve effects is usually based on the price of the
product as if price raise then the demand will decreases. Other factors such as decrease in the
quantity of customers in the market, the taste and preferences are not accepted by the customers,
income decreases and if the price of related goods is decreases then consumer will switch over to
that product instead of consuming the earlier product.
Changes in supply
(Cook, 2017)
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Supply is an economic term. Supply is the products that are available for customers to purchase
at any price specified. The quantities that the seller is willing to pay at different prices. Supply is
not constant (Cook, 2017).
Law of supply
The supply of the product is directly related to the price of that product. When the price of the
product increases the supply of that product will also and when the price decrease the supply for
that product will also decrease other factors remaining the same. When the prices are higher the
profits will also high (Newbery, 2018).
The factors affecting supply are as follows:
 The price of the product and services
 The price of the related goods
 Production factors prices
 Input price
 Number of the production unit
 The technology of the production
 Producers expectations
 Policies of government
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The changes in supply occur due to a change in the factors mentioned above. The changes in the
supply can be occurring in two manners: an increase in supply and decrease in supply. Changes
in supply can be occurring due to changes in the output, changes in the technologies, changes in
a number of competitors (Newbery, 2018).
Changes in the supply curve leading to a shift in the curve of supply. The result of this is that the
market will be an imbalance. To make the market in balance changes have to make in the prices
as well as in-demand (Cook, 2017).
Changes in supply are due to changes in the price of the related goods, taste, income, and
preferences of the consumers, etc. the possibilities of changes in supply are:
 Increase in supply (right shift in the curve)
When the supply increases the demand will be constant and the price of equilibrium will go
down. To understand this better let us assume, new technology in the market has been
introduced, the supplier will eliminate the new technology in the place of old technology. The
result of this will be increased in supply with the other facts will be the constant. The supply will
increase at the past equilibrium price. The impact of this will increase in the competition and the
price will reduce.
 The decrease in supply (left shift in the curve)
This is the opposite of the increase in the supply. Now suppose the new technology will not be
adopted by the supplier this time and the old technology used by the supplier becomes obsolete
and the level of production will also decrease. The outcomes of this decrease in supply.The
decrease in supply will increase the demand at the earlier price of equilibrium. Increase in
demand leads to an increase in competition between the buyers and the price will increase. The
conclusion is that due to a decrease in supply, the equilibrium price will increase. The quantity
demand will also decrease due to the increase in price. And the supply curve will be a shift in the
left (Friedman, 2017).
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Effect on the prices due to changes in the supply
A. Changes in demand:
 A decrease in demand will decrease in the price of the goods. The result of demand decease will
increase the supply at the same price. When the supply increases the price of the product will
decrease and the consequences of the decrease in the price will also decrease in the supply and
then the output will also decrease.
 Increase in demand will increase in the price. When the demand increases the supply will also
increase at the same price as in the starting and the result of this is increased in the price due to
excess demand and when the price will rise the suppliers are willing to sell more quantitiesand
then the output will increase (Newbery, 2018).
B. Changes in supply:
 Increase in supply results in a decrease in the price. When the supply increases the demand will
also increase in at the initial price. And the excess of has an impact on the decrease in the price
to the quantity.
 When the supply decreases the price will increase, the decrease in the supply creates an increase
in the demand at the starting price, and when the demand is exceedingthe price will rise
(Friedman, 2017).
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C. Changes in both demand & supply:
 When the change in the demand and supply will be in opposite directions:
 In this situation, the changes in the prices can be determined. When the demand decreases the
supply will increase and the price will fall.
 When the demand will increase and the supply decreases will result in an increase in the price.
 When the demand and supply will be in the same direction:
 When both the supply and demand will increase the price cannot be determined in this case the
customers are willing to buy more and the firm will also want to supply more.
 When the supply and demand both will decrease in this condition also the price cannot be
decided. The consumers demanded less output and same as the suppliers will also want to supply
less (Cook, 2017).
Change in demand and supply on price
It is well established rule that all the three economical factors, namely supply, demand and price
are highly related to each other. A slighter change in supply will impact the price to a larger
extent. In the same manner, a minor change in demand will tend to impact the price. However,
the impact of supply on price is totally different from that of impact of demand on price. It can
also be understood from the fact that while increase in demand will increase the price, increase in
supply tends to decrease the price of final product or output. Thus, it can be said that demand and
price have positive relationship between them. On the other hand, supply and price are
negatively correlated (Larondelle and Lauf, 2016). However, the extent of relationship depends
on several other factors. In case of some goods, such relationship can be linear as well. It means
that if demand increases by 5% price also increases by the similar percentage, i.e., 5%. Same is
the case with supply and price. It is also possible that there is linear relationship between the
demand and price but non-linear relationship between the supply and price. Thus, it is advisable
to state that there can be different possible combinations depending on various factors affecting
or influencing the demand and supply. In some cases, the relationship is opposite as well. In
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other words, demand and price tend to show the negative relationship between them in relation to
some goods.
Supply and demand diagram to depict the relationship with price
Diagrammatic representation between the supply and price is known as demand curve. In the
same manner, graphical representation between the demand and price is called as supply curve.
(Guiso, et. al., 2017)
The above image depicts the graph of variables, namely price and quantity demanded. Price has
been shown on the y-axis (Guiso, et. al., 2017). On the contrary, values of quantity demanded
have been plotted against x-axis. Generally, price is shown on the y axis and x axis is used to
plot the values of demand or supply as the case may be. The relationship between the supply and
price as well as demand and price can be better understood with the help of various diagrams.
Not only relationship but these diagrams also assist in gaining an understanding regarding the
shift and movement in the demand curve along with supply curve.
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