Understanding how market equilibrium is maintained is essential for business managers. As a manager, it is important to consider how economic principles, and specifically supply and demand, as a part of everyday business decisions. This paper will describe the economic principles concepts of supply, demand, and market equilibrium and discuss their relationship to real world examples.
According to McConnell, Brue and Flynn (2009) demand is a schedule or a curve that shows the various amount of a product that consumers are willing and able to purchase at each of series of possible prices during a specific period of time (McConnell, Brue, & Flynn, 2009, p. 46). The inverse relationship between price and quality demanded is the quantities of a product that will be purchased at various possible prices (McConnell, Brue, & Flynn, 2009). An important concept of demand is when prices fall, the quantity demanded rises and as the price increases, the quantity demanded falls.
Determinants of demand are (1) consumers’ tastes (preferences), (2) the number of buyers in the market, (3) consumers’ incomes, (4) the prices of related goods, and (5) consumer expectations they change the shift of the demand curve. * For example to show how the law of demand works we will use the sale of school supplies. A well know superstore retails school supplies such as notebook paper for $2. 99 and pencils for $1. 29. At their back to school sale their prices for notebook paper drops for $1. 0 and for pencils $. 29. As the prices went down, more consumers’ purchases school supplies.
The superstore is a strong believer in the law of demand concept. Supply is a schedule or curve that shows the various amounts of a product that producer are willing and able to make available for sale at each of a series of possible prices during a specific period (McConnell, Brue, & Flynn, 2009). As prices rises, the quantity supplied rises; as price falls, the quantity supplied falls.
The law of supply is the relationship between the quantity supplied rises and the quantity supplied falls. A supply schedule shows us that other things equal, companies will produce and offer for sale more of their product at a high price than at a low price. Determinants of supply are the other things equal that can and do affect supply. The basic determinants of supply are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market (p. 2).
* An example of how determinants affect supply. Prices of other goods; companies that produce a particular product, say Nike tennis shoes, can sometimes use their plant and equipment to produce alternative goods, like headbands and sweatpants. The higher prices of these “other good” may entice Nike tennis shoe producers to switch production to those other goods in order to increase profits. Equilibrium price or marking clearing price is the price where the intentions of buyers and sellers match (p. 54).
According to McConnell, Brue, and Flynn it is the price where quantity demand equals quantity supplied (McConnell, Brue, & Flynn, 2009). Competition among buyers and sellers drives the price to the equilibrium price; once there, it remains unless it is subsequently disturbed by changes in demand or supply (p. 55). When quality supplied exceeds quantity demanded this is known as surplus. Surplus drive prices down. When quantity demanded exceeds quantity supplied it is a shortage. The law of demand assumes that consumers will buy more of a product at a low price than a high price.
Changes in determinants of demand shifts the market demand curve. The law of supply states that, other things equal, and that producers will offer more of a product at a high price than at a low price. Equilibrium price is when market demand and market supply adjust the price to the point at which the quantities demanded and supplied are equal. Knowing the market equilibration process is important for manager when making sound business decisions, as it relates to demand and supply.