Demand And Supply

Every organisation which provides goods or
services to fee paying customers must, by its very
nature, charge price for that good or service, to
pay for its costs, have retained profits for
investments and to keep its shareholders happy. In
theory, the market price of any good or service is
determined by the interaction of forces of demand
and supply. There is an old saying, that “if you can
teach a parrot to say ‘demand’ and ‘supply’ you
have created a trained economist.”1 There is some
truth to this saying as most problems in the
economics can be examined by applying the rules
of demand and supply. Therefore, the concepts of
demand and supply can be claimed to be among
the most important in economics. In order to
understand either of them it is necessary to
examine the factors that determine them. Although,
a good’s price relative to other goods is probably
the most important factor influencing demand for
most goods most of the time, there are other
factors as well. These are disposable income, the
price of complimentary goods and substitutes,
tastes and preferences, expectations, size of
population, advertising. Suppliers on the other
hand are interested in making profits, and thus
anything that affects profitability affects the supply.
These include the price of other products, costs,
technology and goals of firms. a) The price of any
product is determined by the interaction of the
forces of demand and supply. The market price is
set at the point, where demand equals supply,
equilibrium. This can be seen from figure 1. For
the purpose of this essay we will look at the prices
of beer. We can see that, the price is set at 1.65,
where D intersects S. Fig. 1 The Penguin
dictionary of economics defines demand as “the
desire for a particular good or service supported
by the possession of the necessary means of
exchange to effect ownership”, while supply is
defined as:” the quantity of a good or service
available for sale at any given price”2. When an
economist refers to the demand for a product he
means effective demand, which may be defined as
“the quantity of the commodity, which will be
demanded at any given price over some given
period of time.”3 However, the price of the good
or service varies according to the changes in either
demand or supply. In order to show that it is
necessary to look at determinants of demand and
supply separately. One of the factors that might
affect the demand for beer is a disposable income,
income less taxes. For most of the products, when
disposable income goes up the demand goes up as
well, and vice versa, thus affecting the price of the
product. A rise in income leads consumers to buy
more of a product, as they have more money to
spend. This can be seen from figure 2. Fig.2 Thus,
we can see that, when income rises, demand shifts
to D1, and since S curve remains the same, the
price of beer goes up to 2.00. The other factor
that influences demand for beer, could be the
change in consumer tastes and preferences. Some
industries like clothing and furniture are more
affected by it than the others. However, in beer
market it also has a great effect. It can go out of
fashion if consumers believe that, it is more
fashionable to drinks spirits or not to drink at all,
and vice versa consumers might decide that beer is
more fashionable than spirits. The effect of fashion
and tastes on the prices can be seen from figure 2.
If beer becomes less popular D shifts to D2 and
the price becomes 1.45, while if it is more
fashionable D shifts to D1 giving the new
equilibrium price of 2.00. Another factor, which
influence demand, is the price of other products,
substitutes or complementary goods.
Complementary goods are purchased together to
satisfy one want, and these goods are in joint
demand. For beer, the best example could be
pubs and night clubs. If the prices of admission to
night clubs goes up, the demand for beer is likely
to go down and thus the price will go down, so in
figure 2 the D curve will shift to D2 thus giving the
new equilibrium price of 1.45. On the other hand,
if night clubs were to make the admission free
more people would go and they would have more
money to spend, thus shifting D curve for beer
would shift to D1 giving the new price of 2.00. In
modern world the advertising can also cause
changes to the demand. A successful advertising
campaign can increase the demand, and thus
price, by shifting the demand curve to the right and
at the same time move the demand curves of the
competitors to