Economics: Demand and Supply, Essay Example

Demand and Supply

1. Law of Demand: According to the law of demand, there is an inverse relationship between the price and quantity demanded of a good and/or service. As I think about it, I have been applying the law of demand all my life, even without realizing it because it seems so natural. Like every person, I only have limited financial resources and several choices. Money spent on one particular item leaves me with fewer financial resources for other goods and if the price goes up, I may have to forego even more of my other needs and desires. As a result, I will be less willing to buy the good if it becomes more expensive and vice versa.
2. Other determinants of demand: This concept teaches me that demand for goods and services is also influenced by non-price factors. One of the factors that leads to change in demand is price of alternatives. Last year, I wanted to buy a video game console and my first choice was PS3. But I also considered the prices of other video games consoles such as Xbox 360 and Wii. I eventually went with PS3 but I might have chosen Xbox 360 if the console was priced at least 20 percent lower.
3. Law of Supply: According to this law, there is a positive relationship between price and quantity supplied. I still remember reading in the newspaper few years ago when oil prices were a serious concern that higher prices of hybrid vehicles were encouraging automakers to increase supply of hybrid vehicles. It makes sense because higher prices increase the profit potential and if I open up my own business, I may also do the same.
4. Other determinants of supply: According to this concept, supply is also influenced by non-price factors. This concept helps me make better sense of the economic news I read about agricultural products. I still remember how poor orange plantations yield in Florida due to adverse weather conditions resulted in an increase in Tropicana’s orange juice prices.
5. Equilibrium: After reading about this concept, I realized I see it at work at almost every retail outlet I visit. Goods that sell slow often go on sale because quantity supplied exceeds quantity demanded and as a result, retail outlets low prices to boost demand. Similarly, items that are in high demand sometimes go up in prices because the outlets can still sell all their stock at higher prices.
6. Price system: I find the price system as a reflection of changes in demand and supply really fascinating. I myself use the price system when buying and selling online. Sometimes I buy items online to sell back for profit and the prices of items on sale give me a good idea of which items are in scarce quantity or in demand and may be easier to sell for profit.
7. Transaction costs: The concept of transaction costs helps me understand the importance of information and efficient market systems. I realize I obtain lower prices through internet shopping because of lower transaction costs. If I go to mall, the high transaction costs discourage me from doing price-comparisons but internet doesn’t pose same problem.
8. Change in Supply and Demand: This concept helps me understand why the housing bubble occurred before the recent financial crisis. Housing supply increased due to lower production costs such as cheaper access to funding but prices still continued to rise. This is because the demand for housing increased at even greater pace due to rising income levels as well as optimistic future outlook among buyers.
9. Price Ceilings: Price ceiling refers to the highest price that can be set for a good or service. I went to New York City which is quite expensive but I learnt there that many city-owned public apartments have rents that cannot exceed a certain upper limit. I believe this is a good policy to help low-income people in big cities with high cost of living since housing can consume a considerable proportion of one’s income. Price ceilings may lead to black markets but in some instances they can also help reduce poverty.
10. Price Floors: Price floors refers to the lowest price that can be set for a good or service. I read in a newspaper that the U.S. agriculture industry supports price floors. While it may offset some of the competitive disadvantage faced by U.S. agriculture industry against developing countries, I believe overall this is a bad policy because the better alternative is international trade which may result in low prices for Americans. Price floors artificially keep the prices higher which are not supported by the forces of demand and supply.