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Supply and demand is the foundation of economic stability. Changes in supply and demand affect a society’s eminence. As supply and demand changes, so does the price and quantities of goods. These changes in price and quantity influence market equilibrium. Factors that help adjust the market equilibrium are substitutions. In turn, the substitutions affect the price and ability of elasticity. There are four market systems that operate within the role of the economy. The economist play’s a diverse role within these markets.
Supply is the ability and willingness to sell and produce certain quantities of a good at an alternative price and a given time period. Demand is the ability and willingness to buy certain quantities of a certain product at alternative prices at a given period.
We supply resources to all different markets that are looking for jobs. Then we offer our labor in exchange for income. After that we demand goods when we are out shopping the markets. Then we offer money in exchange for something from the markets.
If there happens to be a product that is greater than the quantity of it demands then there is a surplus. With a surplus customers or consumers will buy down the markets price. If the market decreases the quantity demanded will increase and the quantity supplied will decrease until the quantity demand is equal to the supply. Then the surplus is no longer and market equilibrium will be established.
To explain how changes in price and quantity can influence market equilibrium, one should first define equilibrium. Equilibrium, as defined by Steven Tomilison in (Understanding Market Equilibrium, Determining A Competitive Equilibrium, p1,) “is a situation from which there is no tendency to change.” That is a market has reached its equilibrium point when there exists no pressure from either buyers or sellers for a price or quantity change. This indicates that at this price the demand for a product equals the quantity available or, to put it another way, when supply equals demand. When the price of this product is raised, the number of buyers willing and able to purchase the product at the higher price decreases and the number of this product that the sellers are willing and able to produce, at that price, increases creating an excess supply. When the price is lowered the number of this product demanded increases and the number of this product that the seller is willing and able to produce at that lower price decrease, creating an excess demand. If a seller increases the quantity or supply of a product to a market it will automatically create an excess in supply thus lowering the price and influencing the market equilibrium.
The China Agricultural Economic Review describes food as one of the basic necessities for the existence. The Review describes the relationship between supply, demand and price in Nigeria. Between 1998 and 2001 Nigeria experienced dramatic food shortages which made prices increase on food. The next closest substitute for domestic food product is imported food and livestock to combat shortage. Nigeria experienced large import bills from their shortage, and that cost is passed directly on to consumers. Domestic prices are high and import prices are the same price or higher. The food supply keeps this part of the economy with elastic. If this market did not have a shortage of food, regular food prices and imports would be lower and more competitive. This market would be more inelastic.
Elasticity is also referred to as flexibility (Harrison,2004). This flexibility is typically graphed by looking at price elasticity of demand (PED). Dividing the percentage change in demand by the percentage change in price gives the price elasticity of demand. Many businesses look at PED to determine competitive pricing and profit margins before investing in new markets. The government uses PED to see the impact of taxes and subsides (Harrison, 2004). Taxes on cigarettes or alcohol may discourage consumption because of price increases. But a government subsidy on canned green beans could increase the quantity traded versus price change. There is a direct relationship between the necessity of a good and substitutions in market. Capitalism is at its best when this relationship shifts based on world events and market conditions.
Market systems can be as diverse as any type of business may be diverse. Economists who study economics divide market systems into four types: monopoly, oligopoly, monopolistic competition, and perfect competition (Mankiw, 2007). These four types of markets help to shape how our economy works not only here in the U.S., but for foreign countries as well.
The first type of market system is a monopoly. A monopoly is a firm that is the sole seller of its product without any close substitutes (Mankiw, 2007). A firm remains a monopoly when no competition exists within the market. For example, trash collectors, cable companies, and even some phone companies are considered to be monopolies because no one can steal business and can charge any fee for the services. The main idea for monopolies to survive is that a monopolist’s marginal revenue is always less than the price of its good (Mankiw, 2007).
The second type of market system is an oligopoly. An Oligopoly is a market in which only a few sellers exist, and as a result, the actions of one seller in the market have a large impact on the profits of all the other sellers (Mankiw, 2007). This is a type of imperfect competitive market system in which a few numbers of sellers selling the same product, compared to the monopoly, where only one seller is selling one type of product.
The third type of market system is a monopolistic competition, in which many firms sell products that are similar, but not identical (Mankiw, 2007). In this type of imperfect market system, the sellers have a monopoly over the products that are produced but are competed against for the same types of buyers.
The final type of market system is a perfect competition, in which many sellers sell the same type of product. In this type of market system, the term “perfect” comes in to play because the price of the product always equals total cost of the product due to there being many different sellers of the same type of product.
Successful business owners always want to turn a profit, but depending on which type of market the business will enter into, one might have one’s work cut out for them. Understanding the cost of production and the type of market they are entering into is the role of the economist in this situation. The economist decides how to target the competitors (if any) and figures on the best way to gain market share selling the company’s product at the lowest price possible to earn the most profit.
The changes in supply and demand are caused by price, quantity of the product, buyers and sellers. As prices change buyers are affected on how much they can afford to purchase. As quantity increases it can lead to excess in supply therefore, the price decreases thus creating market equilibrium. As necessities of goods and the availability of substitutions increase, so does the price elasticity. As supply and demand fluctuate within different market places the economist’s role is to help business people understand their market and how to best gain their share in the market they are in.
Abiodun Elijah Obayelu, V.O. Okoruwa, O.I.Y. Ajani. (2009). Cross-sectional analysis of food demand in the North Central, Nigeria :The quadratic almost ideal demand system (QUAIDS) approach. China Agricultural Economic Review, 1(2), 173-193. Retrieved from ABI/INFORM Global database. (Document ID: 1657972491).
Harrison, S. (April 2004). Price elasticity of demand: Simon Harrison assesses the usefulness of price elasticity of demand as a business tool. Business Review (UK), 10, 4. p.12(2). Retrieved from General OneFile via Gale:
http://find.galegroup.com/ips/start.do?prodId=IPS
J. Tomlinson, Economic Learning Path, Video Segment, The Market Forces of Supply and Demand, (4) 4.4, Supply and Demand together 4.4-1.
Mankiw, N. (2007). Principles of Economics (4th ed.). Mason, OH: Thomson South-Western
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