Supply and Demand and Price Elasticity Paper

Essay by rglawson45University, Bachelor'sA-, February 2010

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Supply and Demand and Price Elasticity PaperPricing, supply, and demand are the foundation of the economic structure. This paper is intended to highlight the affects of each. The changes in supply and demand will be looked at along with how changes in price and quantity influence market equilibrium. It will also look at how the necessity of a good and the availability of substitutions affect price elasticity. Finally, it will compare and contrast market structures and the role that economics plays within these systems.

Supply and DemandSupply and demand are the root concepts of economic analysis since economics is basically concerned with a result and how the result is achieved. The quantities of goods or services demanded satisfy the requirement for the ends. These concepts are relative and are interchangeable. Supply and demand are opposing concepts, in that demand is an inverse or falling function of the price whereas supply is a direct or rising function.

Although both supply and demand are important functions, it is necessary to establish equilibrium between them. This would mean reaching a place where there is an equal point or agreement between the consumer and the producers. This can only be attained when the quantities demanded and the quantities supplied are at an equal point, when there is no competition between buy and sell.

There are many factors that influence changes in supply and demand. The most prevalent would be pricing. When a product is priced to high, the demand for such product will eventually decrease. Conversely, under pricing could cause the demand to sky rocket and create a problem with maintaining supplies. Other factors would include lifestyles of individuals. This would include religious beliefs and the economics of where an individual lives.

Changes in price and quantity influence market equilibriumThe way market equilibrium is influence is basically when the buyer and supplier can come to an agreement on what the right price and quantity are. It influences the market equilibrium by "Any change that measures the quantity demands at every price, it shifts the demand curve to the right and is called an increase in demand" (Mankiw, 2007). If they have changes to price and quantity during anytime, it will shift the curve and increase or decrease the demand which will end up changing the equilibriumPrice ElasticityElasticity is a measure of the responsiveness for quantity demanded or quantity supplied to one of its determinants. Demand or supply of a good is said to be elastic if the quantity demanded or supplied responds substantially to changes in price. Demand or supply is said to be inelastic if the quantity demanded or supplied responds only slightly to changes in price (Mankiw, 2007).

Availability of close substitutes will affect the elasticity of a good. If there are many close substitutes goods are called elastic. Tomlinson (2007) uses the example of soda pop. If one supplier of soda raises their prices, people will simply switch to a different brand. This makes the good of soda elastic. There are many substitutes and a change in price will produce a noticeable change in the amount demanded. If there is not a close substitute for a good such as eggs than that good is inelastic. Because there is no close substitute for eggs, even though the price is raised, people will not change their buying habits. There will not be an obvious change in demand (Mankiw, 2007).

Necessity of a good also affects whether or not a good is elastic or inelastic. Necessary goods such as food or doctor visits are necessities and would not be very elastic. People will still buy food and go the doctor even if the prices are raised. Such items like jewelry or sailboats are luxuries and not necessary so these goods are elastic and if the price goes higher fewer of these items would be sold (Mankiw, 2007).

Compare and contrast market structuresThere are many different structures and they all have different roles of economics. The different structures are perfect competition, monopolistic competition, oligopolies, and monopolies. Each structure has a specific role it plays in society. Without these structures buyers would not have the choices that they do. The first structure is perfect competition. Perfect competition is "a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker" (Mankiw, 2007). The price of products is determined by what is going on in the market. In this structure there are many products that are all the same. The sellers have all the same or similar products and so the results on the market are negligible. "Each buyer and seller takes the market price as a given" (Mankiw, 2007). The second structure is monopoly. Monopoly is "a firm that is the sole seller of a product without close substitutes" (Mankiw, 2007). Monopolies can determine the price of its product and not worry about competition. "In many cases, monopolies arise because the government has given one person or firm the exclusive right to sell some good or service" (Mankiw, 2007). The price of a product is determined by the company, and they can say what a product could sell for and what they think buyers will pay for the product. The third structure is oligopoly. An Oligopoly is "a market structure in which only a few sellers offer similar or identical products" (Mankiw, 2007). An example of this that the textbook written by Gregory Mankiw called Principles of Economics uses is Tennis balls. The fourth structure is monopolistic competition. Monopolistic competition is "market structures in which many firms sell products that are similar but not identical" (Mankiw, 2007). A good example of a monopolistic competition structure would be books. The third and fourth structures called oligopoly and monopolistic completion are considered part of the imperfectly competitive market, which means they do not meet the perfect conditions or the monopoly structure.

ConclusionMany items cause changes in demand and supply including price, income, and personal values. These factors also influence market equilibrium and elasticity. Another thing that can cause economic change, are the different types of markets.

ReferencesMankiw, N. (2007). Principles of Economics. Thompson Learning Inc.

Tomlinson, S.; Cengage Publisher. 2009 UoP Course Material accessed 2/6/10