Price Theory: Demand and Supply

            Demand refers to how much of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.

            The law of demand states that people will buy more of a product at a lower price than at a higher price, if nothing changes. At a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price. Besides that, people tend to buy some goods as a substitute for others more expensive if at a lower price.

            A demand schedule is a table listing quantities demanded of a good at different prices.

 

The demand curve for this example is obtained by plotting the data:

 

Such a curve is called a demand curve. Its downward slope reflects the law of demand. People buy more of a product, service, or resources as its price falls. The relationship between price and quantity demanded is inverse.

            Market demand provides the total quantity demanded by all consumers. In other words, it represents the aggregate of all individual demands. Market demand is an important economic marker because it reflects the competitiveness of a marketplace, a consumer’s willingness to buy certain products and the ability of a company to leverage itself in a competitive landscape. If market demand is low, it signals to a company that they should terminate a product or service, or restructure it so that it is more appealing to consumers.

            A change in the demand schedule or, graphically, a shift in the demand curve is called a change in demand. A change in income will cause a change in demand. The direction in which a demand curve shifts in response to a change in income depends on the type of good represented by the demand curve. There are two types of goods: normal goods and inferior goods. An increase in the preference or taste for a good will shift the demand curve for the good to the right. A decrease in the preference or taste for a good will shift the demand curve for the good to the left.  Expectations about future income and prices can shift the demand curve. For example, someone who expects higher income or prices in the future will probably buy more goods today. In this case, the demand curve will shift to the right. An increase in the population causes a greater quantity of goods to be demanded at every price level. This causes the demand curve to shift to the right. Substitutes are goods that can replace each other in consumption. They are related such that an increase in the price of one good will cause an increase in the demand for the other good. Complements are goods that are jointly consumed. They are related such that an increase in the price of one good will cause a decrease in the demand for the other good.

            A change in quantity demanded is a movement from one point to another point, from one price-quantity combination to another that is on fixed demand curve. Amount demanded rises or falls according to the fall or rise in price. In such a case other factors influencing demand are held constant. The demand function or the demand curve never changes. The change takes place in the same demand curve. The existing demand curve contains the changes in the different price-quantity combination. In case of change in quantity demanded movement takes place along the existing demand curve.



Supply

Supply is the quantity of goods and services willing to be produced by firms or offered for sale at each of a series of possible prices during a specific period or particular place at alternative prices. As price rises, the quantity supplied rises, conversely, as price falls, the quantity supplied falls. This relationship is called the Law of Supply. The quantity supplied of a good depends solely on the price of good itself. While the supply of good is depends on the price of other goods and technology, prices of factors of production and the other relevant factors like weather.

Supply Curve

The supply curve at above is observed that the choices that made by the firm is called supply. A producer will supply more when the price of output is higher, vice-versa. The slope of the curve is positive or upward sloping. Note that when price rises from $5 to $6, quantity supply no longer increases. This is due to the constraints in resources such as land and technology, the firm is facing in the short-run. Therefore, the firm is unable to increase production despite an increase in market price. So due to the Law of Supply, when the price is high, selling is profitable so the amount supplied is large. Larger quantity supplied mean that firms will work longer hours, buy more machines and hire more workers so, firms will supply more when price is high.

Movement along supply curve

It is a result of change in the quantity supplied due to the change in the price of good itself.

A fall in price - impact on supply

When the price falls from P1 to P2, quantity supplied will fall from Q1 to Q2. This is downward movement along the supply curve.
A lower price will make firms less willing to supply as it is less profitable to supply. This will mean a movement along the supply curve downwards and to the left (a contraction of supply).

Shifts of supply curve

It is a result of change in the supply due to the change in factors other than price of the good itself.

Shifts of supply curve to the right (S to S2) means supply increases from Q5 to Q6. While shifts of supply curve to the left (S to S1) means supply decreases from Q5 to Q4.

When factors other than price affect the supply it results in the shift of supply curve. The supply curve may move inward or outward. A shift of supply curve outwards to the right will mean an increase in supply at the same price level. When the supply curve moves inwards to the left it means that less is being supplied at the same price level.

Market Supply

It is the sum of all the quantities of good and service willing to supplied per period by all firms and obtained by adding up all the individual firms’ supply curve. The market supply show the total industry output.

Global Food Prices Rises Year by Year Due to the Supply to Decrease.

Food indicate of grains, sugar, soybean, oil and fats and others food. Last four months since 2nd of December 2011, global food prices had increased by 8%.While in March 2012, there were only 6% below February 2011 historical peak.

Based on the graph, the fat and oils has increased the most, with a quarter of increase of 13%, followed by increase of others food and there is an increase of 4% of the price of grains. At the same time, the price of others food increases since January.

What is the factor that causes the food price to increase?
        The price of oil had increased gradually since December 2011 and this leads to the price of food increases. WHY? Why when price of oil increase, price of food will increase? This is because transportation of food needs oil for vehicle to send the food from one place to another place. In the year 2011,the price of barrel cruel oil average US$117 in March and 13% higher than average in December 8% higher than a year ago in March.
        On the other hand, the decrease in supply at Republic of Yemen is also one of the main causes. Due to geographical tensions, there are limited food supplies from Republic of Yemen. In the year of 2012, Republic of Yemen general inflation reaches 13.79% and the food inflation also stood up to 12.26%. The price of wheat and wheat flour that sold by wholesaler is 4120YR/50kg and 4900YR/50kg. However, on the April 2012, the price of wheat lowest at 120YR/50 kg at Sa’ada. This means that the price level of food increases in a fast speed.

           When geographical tension Republic of Yemen happened, this causes the decreases in production of size of crop. Therefore, the supply of food decreases. There will be a leftward of supply curve from S1 to S2. However, the consumers desire to buy the food doesn’t change as food is a necessity. This is shown on the graph as well, demand curve doesn’t change. Decrease in supply causes the market equilibrium to change. When quantity of food decreases from Q1 to Q2, this lead to the increase in price level of food from P1 to P2. This shows that when the lower the supply of food, the higher the price of food. Hence, when the equilibrium price of food increases from P1 to P2 , the equilibrium quantity will decrease from Q1 to Q2 . This leads to a lower quantity exchanged.