Demand and Supply, Essay Example

Laws of Supply and Demand 

The laws of supply and demand are as shown in the graph above. The law of supply states that quantity supplied increases with an increase in prices of the product and reduces when the price reduces. On the other hand, the law of demand states that demand quantity increases with a decrease in prices of the product and reduces as the price increases. As shown in the graph above, the level demand has increased shown by the blue line, as the prices increase to the left. The level of supply has increased with an increase in the prices. To elaborate this further, take a point in the graph, say the box between $10 and $ 12. For quantity demanded, movement to the left (increase in price) leads to a decrease in quantity demanded (movement from 8000 to 6000 units). For quantity supplied, movement to the left (increase in price) leads to an increase in supply (movement from 8000 to 9000 units).

Equilibrium price and quantity in the market

An economy at equilibrium is at the point where amount of goods or commodities demanded by the economy is matched by the suppliers (demand=supply). The equilibrium price for the economy is $10 and the equilibrium quantity is 8,000.

Introduction of Price Floor

The introduction of a price floor would seek to shield a commodity from realizing sharp drops in its price. The price floor can occur above or below the equilibrium. When the price floor is set at $12, above the equilibrium price, producers are forced to sell the commodity at the government-prescribed prices. This increase in price would lead to a decrease in demand as fewer customers are willing to purchase the commodity at the new price. On the other hand, the higher prices encourages producers to increase supply as they are more willing to supply the commodity at the new price. The decrease in demand and increase in supply leads to the development of a product surplus in the market. The government will be forced to take measures to offset the deficit in order to maintain the new price.

Introduction of Price Ceiling

When the price ceiling is set at $6, below the equilibrium price, it force suppliers to sell the commodity at a much lower price. This discourages suppliers from supplying the product as they realize fewer profits. However, consumers are encouraged by the cheaper price s they are more willing to purchase the commodity at a lower price. This leads to an increase in demand coupled with and decrease in supply. This creates a product shortage in the market.

Decrease in Price

When the price of e-readers decreases by 50%, i.e. from then the demand for e-books is expected to increase the demand for e-books. This is because e-readers as complementary products required to be used in reading e-books, influence the general demand and supply of e-books. This increase in demand would be represented by an outward shift of the demand curve.