Demand and Supply: Case study
- The law of demand
- Time and supply relationship
- Price elasticity of supply
- Tax Incidence and dead weight loss
Demand is the quantity of products or services a buyer is willing to buy at a certain price. On the other hand, supply is the amount of goods or services that a certain market is willing to supply at a certain price. The relationship between supply and demand is the one that determines resources allocation. Both supply and demand are represented by the relationship between quantity and price. These relationships are known as demand relationship, for quantity demanded and price relationship. On the other hand, the price and quantity supplied relationship is known as supply relationship (Arnold, 2014). This law states that the higher the price of goods the higher the price. Amount of goods that a buyer can buy at high prices is less as the opportunity cost is high. Less people will buy goods that are being sold at a high price as they will be forced to forego consumption of goods that have low prices. This law shows the relationship between quantity of goods sold and the price of those goods. According to this law, the higher the price of goods that are supplied the higher the supply.
Time is of essence when it comes to supply; the supplies must react to the demand or price but is always difficult. It is therefore important to determine the relationship between time and the supply this will in turn determine the quantity that is needed to be supplied to the consumers (Welfe, 2009). For example, if the demand and price for sweaters is high during the cold season the supply will be able to accommodate the demand through increase their production. On the other hand, if the weather patterns changes the demand and price will change as well. Producers will be expected to shift their production facilities to fit this demand.
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[...] (2009). Knowledge-based economies: Models and methods. Frankfurt am Main: Peter Lang. [...]
[...] Cross elasticity of demand is evaluated through taking the quantity demanded percentage divided by the percentage change of price of its substitute. Cross price elasticity is given by the formula below. Ec = x Where is the price of good A at time 1 is the price of good A at time 2 is the quantity of good B at time 1 is the quantity of good B at time 2 If the price of one good is increased the demand for its substitute increases, this leads to consumers purchasing less quantity of that good. [...]
[...] If capital and labor are mobile elasticity of supply is high compared to when labor and capital cannot be changed. Supply will be more elastic as the time for production increase. The end result is the company failures towards changing the input variables. For perfectly inelastic supply the shift in demand curve does not affect the supply of the product to the market. For cases where the supply is perfectly elastic the company can supply the same amount of goods without change in price, in this the capacity produced has no limit and the price does not change. [...]