Term Paper According to economics, demand is the ability to own something and also the readiness to pay for it. In other words, it is Just like a relationship between the quantity consumers will purchase and the price for it. The product, in which the consumer is interested in, should be in their financial budget. In addition, demands can report the sales that are taking place and some people use them to guess the situation of the market. The quantity demanded, however, is the amount of goods or services that the buyers demand in a market over a time period.
It does not state how much the households feel the need or want for it; instead, it states how much the households would choose to buy after looking at the opportunity cost of their decisions (Fair 42). Opportunity cost defines as the restriction(s) the households face after making their decisions. For example, if you had a choice to either study for a test or go watch a movie with your friends and you chose to study for the test in order to get good grades, the opportunity cost is giving up the time to go watch the movie with your friends. Another way of thinking the quantity demanded can take lace in a coffee shop, like Struck.
If they lower their prices of a tall coffee from $1. 80 to $1. 70, the quantity demanded will rise from 50 coffees an hour to 55 coffees an hour. Quantity of demand is calculated after the sales take place and it lies in the demand curve. Information on the quantity demanded can affect the amount purchased of that demand. Therefore, it can be said that demand is controlled by the quantity demanded according to their relationship. The demand curve shows the relationship between the price and the quantity demanded of a good in the market. When you look at a demand graph, you will see that demand curve has a negative slope (downward).
This curve, which is the opposite of the supply curve, shows that consumers will buy more goods and service when the price goes down and vice versa. As stated by the law of demand, the quantity demanded is negatively related to the price. In other words, the demand curve slopes downward because of the relationship between the price and quantity demanded. For example, when the price of a good falls, it usually turns out to be cheaper than the substitutes of that particular good, which is known as the obstruction effect. Another example of the negative slope is the income of the consumer.
When the price of the good falls, the consumer can buy more of those goods because of their given income. Their purchasing power increases as the price decreases. When the price of a product is high, then only a few consumers may afford it. When the price is low, then the consumers who couldn’t afford it before are now able to buy it, which aims to raise the market demand. According to the law of diminishing marginal utility, when a consumer purchases more units of a product, its marginal utility declines. Therefore, the consumer will purchase more units if the price of the product falls.
New buyers also enter the market when the price falls, which increases the demand sloping downward from left to right. In economic terms, supply is the amount of products or goods that are provided by a company in a market (Fair 68). It shares a relationship between the price and certain price. Furthermore, it displays the number in supplies depending on the price for a given time period. When the supply increases, then the amount of quantity increases as well. According to the law of supply, when the supply increases, hen the price decreases.
For example, ten people want to buy a videotape, but there is only one. The sale of the videotape will depend on the level of demand; therefore, the supply production will increase because they need to produce more videotapes in order to meet the demand. The demand increases when the price of the product decreases. When the price of a good increases, suppliers would want to make more of it, but when the price decreases, they would not want to supply much of it (Simpson). The supply curve has a positive slope because as the price of a product increases, the creation of that product increases.
Since the producer makes good profit in making the product, production will rise depending on the increase of price. In addition, the marginal cost increases with quantity, which allows producers to make more products at a profit at higher price. In the short run, the demand is high, so the supply needs to be made in order to meet the demand. Afterwards, if the consumers are satisfied with the product, then the supply curve increases. However, if they are not satisfied with the product, then the supply curve decreases. The higher the price, the more companies are willing to supply.
When the price falls, supply drops and the demand increases. When the price rises, supply increases and the demand falls. A movement along the demand curve takes place when there is a change in price and a change in quantity demanded. For example, an increase on groceries from $20 to $30 would decrease the quantity demanded in units. Therefore, the change in price results in a movement along the demand curve. A shift in the demand curve changes in factors that were constant in creating the demand curve. The factors include a change in price, change in supply, change in preferences, and change in income.
For example, an increase in the price of Rebook shoes will bring an increase in demand for Nikkei shoes. The increase in demand for Nikkei shoes takes place due to the increase of price for Rebook shoes on the demand curve, which would shift outwards. Another example is that if there is a decrease in price of batteries, then there will be an increase on demand for remote-controlled toys. The law of supply states that the higher the price, the larger the quantity supplied, when all other things are constant. It is shown by an upward positive slope in the supply curve.
A change in price results in a change in quantity supplied, which represents movement along the supply curve (Simpson). Change in price causes a movement along the supply curve and change in other factors causes to shift left or right. For example, a change in the quantity supplied at a given price level will shift the curve. Furthermore, if the change causes an increase in the quantity supplied at each price, then the supply curve would shift to the right. In addition, the supply of one good may decrease if the price of another good increases, which causes producers to reduce larger quantities of the good that is more profitable.
An example of the supply curve shifting to the left would be the increase in price of resources used to produce a good because the sellers would not be able to supply the same quantity at the given price. If the sellers expect prices to increase, they may decrease the the price increases, which shifts the supply curve to the left. The substitution effect is when there is a change of price of a product and the consumer substitutes the good over another. If the price of the good falls, then the consumers will buy more it, instead of looking for other ones to replace.
On the other hand, consumers will buy the other goods as a substitute when the price of the current good increases. There is always a tendency to substitute towards inferior goods because at a lower price, the consumer can get more value of it. The income effect changes the purchasing power of a consumer because of the prince change in the goods that the consumer buys. For example, the consumer can have money left over and have more apples when the price of apples decreases. Income effect and substitution effect move in opposite directions with inferior goods. Inferior goods are researched because the consumer cannot afford a desirable good.
The income effect is a positive relationship between price and quantity changes. For example, Gifted goods are so inferior that the income effect basically takes over the substitution effect. Gifted goods have close substitutes which people prefer but can’t afford to buy. The demand is sloping upward with Gifted goods, but it would not be sloping up if income effect was weaker than substitution effect. When you change your purchase based on the change in price, then it is substitution effect and when the change of price affects your purchasing decision, hen it is income effect.
The labor supply curve is a schedule showing the relationship between the wage rate and quantity of labor supplied (Stilled). When the substitution effect overwhelms the income effect, then the labor supply slopes upward. However, when the income effect overwhelms the substitution effect, then the labor supply slopes downward. In addition, the shape of the labor supply curve depends on the reaction of households towards the changes of wage rate. For example, an increase in wages would benefit the households because they make better income when working the same hours and labor.
The income effect of the wage rate considers working less and the substitution effect of wage rate considers working more. A competitive firm’s marginal cost curve is its supply curve that lies Just above the average of the cost curve. The firm produces the number of outputs to equal the price and marginal cost, which then maximizes the firm’s profit. If the price is below the minimum average variable cost, however, then producing zero units maximizes the profit (Stilled). Moreover, producing zero units is the firm’s fixed cost because it earns no revenue and variable cost.
Since the supply curve of the firm has a positive slope, according to the law of diminishing marginal returns, the marginal cost curve will also be sloped in positive direction. Therefore, a perfect competitive firm’s short run supply curve is its marginal cost curve above the minimum of average variable cost. 1) Fair, Ray C. “Principles of Macroeconomics”. Detroit: Gullah Press, 2008. Print. 2) Simpson, Stephen. “Macroeconomics: Supply, Demand and Elasticity. ” Investigated. N. P. , May 2011. Web. 27 Jan. 2012. 3) Stilled, Joana. “Supply Curve Slopes. ” Entomb. Business Administration, Feb.. 2010. Web. 27 Jan. 2012..