StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

What Causes Change of Supply and How Supply Can Determine Prices - Essay Example

Cite this document
Summary
From the paper "What Causes Change of Supply and How Supply Can Determine Prices" it is clear that in case of necessity items that are related to survival needs, it will be a common trend for all consumers, irrespective of their levels of income, to focus on having the right product or service…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.2% of users find it useful
What Causes Change of Supply and How Supply Can Determine Prices
Read Text Preview

Extract of sample "What Causes Change of Supply and How Supply Can Determine Prices"

Define supply and explain what causes change (shifts) of supply and how supply can determine prices Contents Define supply and explain what causes change (shifts) of supply and how supply can determine prices 1 Contents 2 Supply 3 Shifts of supply 4 Tremendous rise of price 4 Recession 4 Price of inputs 4 Determination of price with regards to supply 5 Price elasticity of supply and its determinants 6 Price Elasticity of supply 6 Determinants of Supply 7 When supply is: 8 Price Elastic 8 Price Inelastic 8 Price Unit Elastic 9 Reference 10 Supply The concept of supply highlights the concept of making varying amounts of quantities, of homogeneous materials available to the consumers at the marketplace, where other factors of micro and macroeconomic issues are in play (Jain and Okhri, 2009, p. 171). It is important to state that during the course of making the various amounts of homogeneous goods available in the marketplace, there will be significant effects with regards to the prices of the commodities. The reason being the existence of a variety of suppliers and manufacturers, who are supplying homogenous or heterogeneous kinds of goods has the power to act as substitutes. These players will try to compete with each other to provide significant amount of value to the customers and thereby generating competitive advantage. This graph displays the supply and demand curve. The point of intersection represents the state of equilibrium in the market. Shifts of supply It is important to note that the state of equilibrium attained by the intersection of demand and supply curve keeps on moving and is not constant in nature. As a matter of fact, it can be said that there can be various factors which may lead to shifts in supply curve. Tremendous rise of price Abrupt rise of prices of certain commodities, which has happened due to the rise of inflation rate in recent times, can at times lead to significant changes in supply. Due to the significant rise in prices of commodities, the general masses become incapable to purchase the same at high rates. This results in building up of inventory. As a precautionary measure to cool down inflation and maintain a significant amount of balance in the market, the suppliers and manufacturers focus on lowering down the supply rate of the commodities (Mankiw, 1998, p. 80). Recession The effect of recession can also induce significant amount of supply shift. In times of recession, for the purpose of boosting the economy, the rate of interest is generally reduced. This automatically contributes to a significant rise in the institutional lending as well as boosting of production of various commodities in the economy. Hence, recession can also initiate significant shifts of supply of commodities in the economy of a particular region (Mankiw, 2011, p. 745). Price of inputs It is observed that the price of multiple input variables and resources can bring about a significant influence in the supply of a particular commodity. It can be said that in the case of rising input prices, there might be immense pressure on the manufacturer to cut down on various costs. This might contribute to a lower amount of production by the manufacturer. Hence, this can automatically contribute to a movement in commodity supply in the market (Taylor and Weerapana, 2011, p. 57). Determination of price with regards to supply In this scenario with an increase or a forward shift in supply, the price points of a particular commodity are supposed to decrease. It can be said that in normal cases, the forward shift in supply happens because of oversupply of the commodities as well as presence of new competitors in the market. Also, in a bid to stay competitive, the firms focus on providing more value to the customer and hence more quantity of a commodity is available at a lower price point. This particular factor is represented below in the form of a diagram: In case of a shortage of supply, it can be automatically said that the availability of commodity in the market is bound to reduce. This creates a tremendous amount of pressure on the suppliers and manufactures of the commodity. As a preventive measure, they will automatically focus on raising the prices of the particular commodity available in the market. This step will significantly help in the contraction of demand of the product in the market. Also, it can be said that with the significant rise in prices, the amount of quantity of the commodity that is being provided to the customers is also reduced in certain cases. The graph below represents the scenario that happens in the case of fall in supply: Price elasticity of supply and its determinants Price Elasticity of supply While discussing the price elasticity of supply, it can be said that the various other economic variables that can have significant amount of impact on supply are assumed to be constant (Hall and Lieberman, 2009, p. 139). Determinants of Supply There are certain factors that help in a great way in the process of determining the price elasticity of supply. Presence of substitute products It can be said that the availability and presence of substitute products in the market, will have a considerable impact in determining the supply factor of a particular commodity in the market. It can be said that with the availability of substitute products in the market, the demand for the main commodity will achieve a significant amount of downfall, thereby impacting the supply as well as price elasticity of the product. Difference between necessities and luxuries There is a significant amount of correlation between the economic trends of luxury products and products of necessity. In most cases the luxury products tend to have an elastic nature of a demand. However, it can be said that the relation between luxury products and their demands are dependent and varies with the change in category and demography of people. For people who have a standard level of income, it can be said that the luxury products hold an elastic kind of demand, while for people with significantly high level of income, the luxury products tend to have an inelastic kind of demand. However, in case of necessity items that are related to survival and basic needs, it will be a common trend for all consumers, irrespective of their levels of income, to focus on having the right product or service. Hence, it can be said that the necessity products are bound to witness an inelastic kind of a demand (Mankiw, 2011, p. 91). When supply is: As per the laws of demand and supply it is quite natural that with the rise in prices for a normal good, the demand for it is bound to decrease, while on the other hand, a significant fall in prices will automatically contribute to the rise in demand for a commodity, product or service. However, there can be three different kinds of scenarios that might emerge as a result of this: Price Elastic It can be said that the demand for a particular product is considered elastic in nature if the value of elasticity is greater than 1. In this particular scenario, the rate of change of price results in a tremendous rise in the demand of the quantity. Price Inelastic In case of inelasticity of price, it can be said that the value of elasticity is less than 1. Here the significant rise in price leads to a considerable amount of fall in quantity a commodity that is being demanded by the consumers in the market place. Price Unit Elastic In case of unit price elasticity, it can be said that the unit change in price will bring in unit change in quantity demanded. It is highly relevant to state in this particular scenario that the value of elasticity is exactly equal to 1 (Mankiw, 2011, p. 93). Reference Jain, T.R. and Okhri, V.K., 2009. Introductory Microeconomics and Macroeconomics. New Delhi: Prince Print Process. Mankiw, N.G., 1998. Principles of Microeconomics, vol 1. United States of America: Harcourt Brace College Publishers Mankiw, N.G., 2011. Principles of Microeconomics. Sixth Ed. USA: South Western Cengage Learning. Taylor, J.B. and Weerapana, A., 2011. Principles of Microeconomics. Seventh Edition. USA: South Western Cengage Learning. Hall, R.E. and Lieberman, M., 2009. Microeconomics: Principles and applications.5E. USA: South Western Cengage Learning. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Define supply and explain what causes change (shifts) of supply and Essay - 1”, n.d.)
Define supply and explain what causes change (shifts) of supply and Essay - 1. Retrieved from https://studentshare.org/marketing/1613709-define-supply-and-explain-what-causes-change-shifts-of-supply-and-how-supply-can-determine-prices
(Define Supply and Explain What Causes Change (shifts) of Supply and Essay - 1)
Define Supply and Explain What Causes Change (shifts) of Supply and Essay - 1. https://studentshare.org/marketing/1613709-define-supply-and-explain-what-causes-change-shifts-of-supply-and-how-supply-can-determine-prices.
“Define Supply and Explain What Causes Change (shifts) of Supply and Essay - 1”, n.d. https://studentshare.org/marketing/1613709-define-supply-and-explain-what-causes-change-shifts-of-supply-and-how-supply-can-determine-prices.
  • Cited: 0 times

CHECK THESE SAMPLES OF What Causes Change of Supply and How Supply Can Determine Prices

Supply and demand: Markets, Prices and price setting

hp We see here that the equilibrium price of supply and demand is P1 and Q1.... supply and demand: Market, prices and price setting I.... The affected part of the equation is the reduction in supply and the increased cost of milk as shown in fig.... This creates a shortage of supply that shows price ceiling is not always a good policy.... In the figure below, there is a rightward shift that means there is a new demand for the product, that at all possible prices, demand for milk will be greater than before....
4 Pages (1000 words) Admission/Application Essay

Supply and Price Relation: Economic Concepts

supply and Price Relation Economic Concepts Author: Introduction Supply is the quantity of a product that a manufacturer is able and willing to sell at a specific price by keeping all supply factors constant that include price of related goods, expectations, price of input and number of suppliers etc.... Therefore changes in supply and demand impact market equilibrium (Mankiw, 2003).... The curve signifies a law of supply implying the more the price is, the more a quantity is supplied....
5 Pages (1250 words) Essay

Macroeconomics. Unexpected changes in the money supply

Unexpected changes in the money supply change the relative prices of sticky-price and flexible-price goods, so the real effects of monetary disturbances can differ across sectors.... With certain parameter configurations, the model has the ability to produce endogenous price sluggishness in the flexible-price sector because the equilibrium response of those prices to a change in money is small in the short run.... With other parameter configurations, the response of flexible nominal prices to a monetary disturbance is sufficiently large that the change in real money balances is small, as are monetary effects on the real economy working through the standard Keynesian transmission mechanism....
15 Pages (3750 words) Essay

Relationship between money supply and inflation in saudi arabia

In the first part of the paper, the term inflation is defined, its causes are discussed, its measurement techniques and how one combat with it are also discussed.... As a part of this policy, in 2006, a heavy subsidy was given to automobile gas sector to cut down the prices by 20%.... The data is extracted from the various reports and researches and it is refined through tools such econometric regression to determine the correlation between the two variables, that are inflation and money supply....
20 Pages (5000 words) Essay

Supply and demand: markets, prices and price setting

iminishing returns; the meaning of supply and demand, and how they interact to ... ) The forces of supply and demand are perhaps the most fundamental to economics, ... ypes of costs, how they are determined, and how to control or reduce them.... ECO 201 Module 2 - 1 supply and Demand: Markets, Prices and Price Setting ... etermine prices; and the differences between changes in supply and demand, and ...
2 Pages (500 words) Essay

The Concept of Price Elasticity in Supply and Demand

emand, simply, is a schedule or curve that shows the various amounts of a product that consumers are willing and able to buy at each of a series of possible prices during a specified period of time.... By ability we mean that the consumer must have enough income or resources to meet the prices, and by willingness, it simple means that the buyer should want to buy the products.... This characteristics states that as the prices falls, the quantity demanded rises and as price rises, the quantity demanded falls....
11 Pages (2750 words) Essay

Supply and Demand II

Use the following table showing the relationship between quantity demanded, quantity supplied, and price in the market for Movie Tickets to answer questions 3a-b:Table 1 : Price, Quantity Demanded (Qd), Quantity Supplied (Qs) of Movie Tickets PQdQs£105030 124535 144040 163545 183050Draw the market supply and demand curves for Movie Tickets from the information provided in the table.... (Figure: supply and Demand with Subsidy) Refer to the figure.... (Figure: supply and Demand with Subsidy) Refer to the figure....
2 Pages (500 words) Assignment

The Law of Supply and Demand

This case study "The Law of supply and Demand" analyzes the law of supply and demand that has influenced man's activities, major activities to say the least, and has a broader role to play in the interrelationships, especially in the midst of globalization.... The law of supply and demand is a broad subject, but can be interesting to talk about in a few pages.... The economic law deals with demand, supply and pricing and the mechanics of the law should be the primary concern of the manager because major decisions here reverberate in the short run and long run....
9 Pages (2250 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us