Demand and Supply Model

Demand and Supply Model, Market Equilibrium and Elasticity

Demand and Supply Model, Market Equilibrium and Elasticity

Introduction

Supply and demand is a fundamental factor in shaping the character of the marketplace, for it is understood as the principal determinant in establishing the cost of goods and services. The availability, or "supply," of goods or services is a key consideration in determining the price at which those goods or services can be obtained. For example, a landscaping company with little competition that operates in an area of high demand for such services will in all likelihood be able to command a higher price than will a business operating in a highly competitive environment. But availability is only one-half of the equation that determines pricing structures in the marketplace. (Langabeer,2005,789) The other half is "demand." A company may be able to produce huge quantities of a product at low cost, but if there is little or no demand for that product in the marketplace, the company will be forced to sell units at a very low price. (Buchholz, 2001, 47)

Factors Impacting Supply and Demand

"When we speak about demand," wrote Robert Heilbroner and Lester Thurow in Economics Explained, "most people think the word just means a certain volume of spending, as when we say that the demand for automobiles has fallen off or the demand for gold is high. But that is not what the economist has in mind when he defines demand as part of his explanation of markets. Demand means not just how much we are spending for a given item, but how much we are spending for that item at its price, and how much we would spend if its price changed."

The demand for products and services is predicated on a number of factors. The most important of these are the tastes, customs, and preferences of the target market, the consumer's income level, the quality of the goods or services being offered, and the availability of competitors' goods or services. All of the above elements are vital in determining the price that a business can command for its products or services, whether the business in question is a hair salon, a graphic arts firm, or a cabinet manufacturer. (Langabeer,2005,789)

The supply of goods and services in the marketplace is predicated on several factors as well, including production capacity, production costs (including wages, interest charges, and raw materials costs), and the number of other businesses engaged in providing the goods or services in question. (Buchholz, 2001, 47) Of course, some factors that are integral in determining supply in one area may be inconsequential in another. Weather, for example, is an important factor in determining the supplies of wheat, oranges, cherries, and myriad other agricultural products. But weather rarely impacts the operations of businesses such as bookstores or auto supply stores except under the most exceptional of circumstances.

Question 1

(a) A fall in the price of fish which is a substitute for chicken

Some markets, such as those for food commodities and ...