Describe about the Economics for Business and Management for Supply Framework.
Every market is characterized by the demand and supply framework of the goods sold in the market. The demand of the good in the market can be referred to the willingness of the consumers to purchase a unit of a particular product. The supply of the goods in the market can be termed as the willingness of the sellers to sell its goods and services at a particular price to the customers. The demand of the product in a market is the change in the demand of the commodity due to the change in the price level (Toutkoushian and Paulsen 2016).
It indicates the relationship between the demand and the price of the product. Both the factors are inversely related that infers that the rise in the price level reduces the demand of the good and vice versa. The supply curve describes the change in the level of supply in a market with the change in price (Fouquet 2014). The price and the amount sold are directly related. Thus, an increase in the price level increases the potentiality of the sellers to sell more and thus supply increases.
Discussion
The demand and supply framework of a market helps to achieve the equilibrium price and the equilibrium quantity of the market. The equilibrium condition in the market is obtained by the interaction of the demand curve and the supply curve of the product in the market. Equilibrium price of products and the services offered in the market is the market price where the quantity of the goods supplied coincides with the quantity of the good demanded (Refer to appendix 1). According to Lowe (2012), the price of the goods and the products in the market is determined by an ‘Invisible hand’. The concept of invisible hand helps the demand and the supply of the goods in the free market to reach the equilibrium position. The demand and the supply framework is effective in determining whether the economy is having a surplus or deficit of a particular goods or is the market at a market clearing stage. In case of surplus or deficit, the demand and the supply shifts and adjusts itself to reach the equilibrium where the market is cleared.
The price elasticity of the products and the services us the measure to show the responsiveness of the quantity of good demanded to the change in the price, ceteris peribus. Tietenberg and Lewis (2016) stated the price elasticity of the product to be the percentage change in the demand of the product due to the one percent change in the price, while other factors remain unaltered. A good can be elastic or inelastic in nature depending about the type of the product. A necessary good is generally inelastic in nature. There is a small percentage change in the demand for the good even when there is a great change in the price of the product. On the other hand, the luxury goods are goods that price elasticity of demand (Markusen 2013). Hence, a percentage change in the price of the good alters the demand of the goods to a large extent. The consumers tend to reduce the demand when the price of the product increases.
The price of the product has a great impact on the demand and supply of the goods and the services. The consumers being rational beings tend to follow the law of demand. The law of demand describes that the demand of a good or service tends to increase with the fall in the price level and vice versa (Refer to appendix 2). Thus, a percentage change in the price level can greatly affect the demand and the supply mechanism of the market. However, the demand and supply further adjusts itself in order to attain a new equilibrium position (Hildenbrand 2014). The demand and the supply of a good are also depended upon the income of the good. The income elasticity of demand measures the change in the quantity of good demanded due to one percent change in the level of income of the consumers. The demand for the goods varies from one product to another depending the type of the good such as whether it is a normal good, luxury good or an inferior good. Moreover, the availability of the close substitutes is another factor that influences the demand and the supply of the products. When a good is normal the consumers tends to increase the demand for the product when the income of the individual increases. As opined by Walras (2013), the inferior good is a good whose demand decreases when the income level of the consumers increases. Therefore, the inferior good has negative income elasticity while the normal good have positive income elasticity. In addition to this, there are situation where the increase in the income of the consumers is not linked with the change in the demand of the good. Zero income elasticity is said to exist in such a case and those goods are called sticky goods (Kalecki 2013).
In case of a good with positive income elasticity, the rise in the income level increases the demand for the good and thus the demand curve shifts rightwards. To compensate the increased level of the demand, the sellers increase the supply of the goods and thus, the supply curve moves outwards. The new supply curve and the demand curve interact at a new equilibrium that provides a new level of quantity demanded and price of the product (Basnet and Seuring 2014). The new equilibrium represents a new price level and a new quantity level of the goods that are higher than the initial equilibrium. On the other hand, a good with negative income elasticity of demand has a characteristic where the demand for the good falls when the income level of the individual increases. The demand curve thus shifts toward the left. The supply curve therefore, shifts towards the left to meet the demand level. The supply falls in order to reduce the chances of creating excessive supply or surplus in the market (Wolf 2014) (Refer to appendix 3).
While considering the setting of the market price of the mobile phones, the demand and the supply of the mobile phones plays a vital role. The supply and the demand in the economic model indicate that in the competitive market, the price level keeps fluctuating until the equilibrium price is set. As per the four basic laws of demand and supply in relation to the price determination, if the demand for the mobile phones increases and the supply remains unaltered, there will be a shortage in the economy (Michaillat and Saez 2013). Thus, a higher price and higher quantity of mobile phones are available in the market. However, if the demand decreases and the supply dies not change, there will be a shortage for the good that will lead to lower equilibrium price and lower quantity. On the other hand, if the supply increases and the demand for the mobile phones remain unchanged, there is lower equilibrium price and higher quantity (Varian 2014). A decrease in the supply with no change in the demand causes the price level to rise and quantity to fall. The demand and supply of mobile phones determine the price of the good. Moreover, the price level is perfectly adjusted in a position where the quantity demanded and the quantity supplied is satisfied.
In the opinion of Rios, McConnell and Brue (2013), consumers being rational decision maker have the information of the market activities. Thus, if the price of mobile phones goes up, the consumers tend to reduce the demand of the product. It is thus important for the sellers in the economy to set the price of the mobile phones at a competitive price level. The basic mobile phones can be considered as the necessity goods in today’s generation however, the smart phones with various other facilities apart from the basic features are considered as the luxury goods. Thus, with the increase in the price level, the demand of the product is greatly affected. The demand for mobile phones in a particular market is effective in setting the price level of the good (Friedman 2016). The higher demand will support the sellers in the market to reduce the price of the product and thereby earn higher profit. The price of the mobile phones are not set by a single individual or an entry of a company in the market. The market price of the phones that is quoted is actually the future price that is determined by the demand and the supply. Canto, Joines and Laffer (2014) mentioned that there are a number of economic factors that affect the price of the mobile phones.
A company selling mobile phone in a perfectly competitive market have a number of competitors who are providing the goods to the customers. Thus, the customers have a number of options of sellers while purchasing the mobile. In such a scenario, it is irrational for a seller to charge extra price for a product that have close substitute (Stank et al. 2012). In doing so the customers tends to avoid purchasing mobile phones from that particular seller and hence, the revenue collection of the seller falls to a great extent. Thus, it is necessary to charge the price of the mobile as per the equilibrium price in order to stay sustained in the competition.
Conclusion
The demand and the supply framework is an important concept in the economics to understand the equilibrium price and quantity of a good in a particular market. The demand and supply of the good work together in order to adjust itself and achieve the equilibrium price. The price level is therefore a desired level at which the consumers are willing to pay for the goods or services and the sellers are ready to sell the product. The theory of demand and supply is thus important to determine the price of the product. On the other hand, the income elasticity of demand also affects the price and the demand of the commodities sold in the market. The income elasticity of demand is effective in evaluating the nature of the commodity whether it is an inferior good or a normal good. Moreover, the price of the mobile phones is set according to the demand and supply of the phone in the market. The higher the demand the lower will the price of the mobile phones. Thus, the understanding of the demand and supply framework of a good in a particular market is effective in understanding the equilibrium price and quantity offered to the market.
References
Basnet, C. and Seuring, S., 2014. Demand-Oriented Supply Chain Strategies–A Review of the Literature. Available at SSRN 2464375.
Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and evidence. Academic Press.
Fouquet, R., 2014. Long-run demand for energy services: Income and price elasticities over two hundred years. Review of Environmental Economics and Policy, p.reu002.
Friedman, M., 2016. A theory of the consumption function. Pickle Partners Publishing.
Hildenbrand, W., 2014. Market demand: Theory and empirical evidence. Princeton University Press.
Kalecki, M., 2013. Theory of economic dynamics (Vol. 6). Routledge.
Lowe, S.E., 2012. Natural resource economics. Economics, 333, p.001.
Markusen, J.R., 2013. Putting per-capita income back into trade theory. Journal of International Economics, 90(2), pp.255-265.
Michaillat, P. and Saez, E., 2013. A theory of aggregate supply and aggregate demand as functions of market tightness with prices as parameters. National Bureau of Economic Research.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Stank, T.P., Esper, T.L., Crook, T.R. and Autry, C.W., 2012. Creating relevant value through demand and supply integration. Journal of Business Logistics, 33(2), pp.167-172.
Tietenberg, T.H. and Lewis, L., 2016. Environmental and natural resource economics. Routledge.
Toutkoushian, R.K. and Paulsen, M.B., 2016. Demand and Supply in Higher Education. In Economics of Higher Education (pp. 149-198). Springer Netherlands.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
Walras, L., 2013. Elements of pure economics. Routledge.
Wolf, D.A., 2014. Getting Help From Others: The Effects of Demand and Supply. The Journals of Gerontology Series B: Psychological Sciences and Social Sciences, 69(Suppl 1), pp.S59-S64.
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