The paper is a business related extrapolation of the laws of demand and how these relate to the setting of the equilibrium on the market. It looks at the laws of demand and the determinants of demand, the laws of supply and the determinants of supply. It also explains the efficient markets theory and surplus. It also looks at surplus and shortage.
Law of Demand
Changes in supply and demand of goods and services lead to a shift in equilibrium. Business managers have to be seized of how market equilibrium is sought in order to make robust business decisions that can pay-off. Market equilibrium is attained when the quantity demanded by the consumers corresponds to the quantity that the firms are willing to supply bearing in mind that equilibrium is basically the price quantity pair where the quantity demanded corresponds to the quantity supplied (Vienneau, 2005). Business enterprises have to be aware of the nuances of the market equilibrium.
Economists postulate that other things held constant, an increase in price of a commodity will make the quantity of that commodity demanded to decline and vice-versa. The demand of a commodity is the amount of that commodity that is bought per unit time at a particular price. An individual will demand a specific commodity if he has a desire for the commodity; is endowed with sufficient resources with which to purchase the given commodity; is willing to spend the resources; and the availability of the given commodity at a certain price, place and time. Businesses take cognizance of the kinds of demands that their clients have. In that regard, there exist different kinds of demands notably: individual demand, market demand, income demand, cross demand and joint demand (Sullivan & Sheffrin, 2003). There are a number of factors that affect demand for a specific commodity and these include: prices of goods and services, income of consumers, prices of a related goods, the population of those using such commodities, the people's expectations about the future prices, the prevailing climatic factors and the distribution of the national income.
Equilibrium is likely to shift under circumstances where people change their preference from hamburgers to hot dogs. The hot dog business' equilibrium is also likely to shift if for instances the United States government strikes a deal with China where hot dogs are sold in China while egg rolls are imported by the United States from China. The demand for hot dogs are likely to be impacted by increase in the price of ground beef, the rise in minimum wage, the worker's industrial action, surging unemployment rates and the increase in price of buns as a result of wheat shortage. The price of the hot dogs is likely to determine the quantity that will be demanded. In price elasticity, the demand for hot dogs may be deemed elastic when the quantity of hot dogs demanded responds greatly to price changes (Sullivan & Sheffrin, 2003). When the quantity of hot dogs demanded responds little to price changes the price elasticity here would be deemed to be inelastic demand. The demand for the hotdogs can be unitary elastic if the quantity of the hot dogs demanded responds equally to the price changes. There are a number of factors that determine the size of price elasticity of individual goods notable of which are economic factors. Elasticity will be higher when goods demanded are luxuries, when there substitutes are easily available and when consumers have ample time to adjust their behavior (Garegnani, 1970).
Figure 1.1 Unitary elastic
Figure 1.2 Elastic and Inelastic demand
The above demand curves differ in their elasticity since curve D1 is more elastic than curve D2. The consumers on curveD1 are more responsive to price change than those on curve D2. The price changes from P1 to P2.
Figure 1.3 Network effects and demand
The fall in price from P3 to P2 raises the quantity demanded from Q1 to Q2 in the short run. Outward expansion of demand to D2 is owed to build in sales. The current lower prices are likely to expand the demand for the network in the near future.
The law of supply postulates that other things held constant the quantity of a commodity supplied changes directly with the price of the commodity. An increase in the price will lead to an increase in the quantity of a commodity supplied and vice-versa. There are a number of determinants of supply namely the price of a commodity, the price of other commodities, prices of other factors used in the production of that particular commodity, goals of producers and the state of technology (Garegnani, 1970).
You’re 79% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.