Week 2: The Basic Demand/Supply Model
Bankole Kehinde Seun
1. Define market demand, market supply, and equilibrium. Show how these concepts can be illustrated on a basic demand/supply graph.
Demand: Quantities of a good or service that people are ready to buy within a given time period (day, week, month, etc.) at different prices, other factors held constant.
Supply: Quantities of a good or service that people are ready to sell within a given time period (day, week, month, etc.) at different prices, other factors held constant.
Equilibrium: This is price of a commodity that is determined by the interaction of supply and demand in a market. Equilibrium represents an agreement between producers and consumers of good or service. In equilibrium the quantity of a good supplied by producers corresponds with the quantity demanded by consumers.
“D” represents Demand which includes all possible quantities demanded at different prices (P), while, quantity demanded (Q) refers to one particular amount that people are ready to buy out of the entire set of possibilities. A similar characteristic can be made about “supply” and “quantity supplied.” The point of interaction between the demand and supply is the point of equilibrium.
2. Discuss the differences between the short run equilibrium and long run equilibrium from the perspective of producers and from the perspective of consumers. Why do you think it is important for managers to understand the mechanics of supply and demand in the short run and in the long run? Give an example of a company whose business was either helped or hurt by changes in supply or demand in the markets in which they were competing.
In economics, short run and long run equilibrium do not refer to a particular or specific period; they only refer to amount of time required for a decision marker such as managers to react to changes in the market. Demand and supply are more elastic to long run when compare with short run. Thus, the major difference between the short run and long run is the flexibility of time the buyers/consumers and sellers/suppliers have to react to changes in the market equilibrium price. From the perspective of producers and consumers, difference between short run and long run can be viewed as:
Short Run, Producers’ Perspective: Time enough only to react to changes in demand (and price) by changing only variable factors of production.
Long Run, Producers’ Perspective: Time enough to react to changes in demand (and price) by changes all factors of production.
Short Run, Consumers’ Perspective: Time enough to react to changes in supply (and price) by changing the quantity demanded. (For example, if the price of gasoline rises, people will react in the short run simply by buying less at the higher price).
Long Run, Consumers’ Perspective: Time enough to react to changes in supply (and price) by changing demand. (For example, if the price of gasoline rises, people will react in the long run by car pooling, buying more fuel efficient cars, and changing the patterns of automobile usage, thus causing demand for gasoline to shift to the left, reducing quantity demanded).
It is important for managers to understand the mechanics of supply and demand in the short run and long run because it helps the manager to evaluate the current market trend and what may happen in a particular market. For instance, when the managers of a company that produces bottled water experience sudden increase in the demand for the product because of changes to consumer tastes, preferences and the major concern over the purity of available public water. Simply enjoying the benefits of this rise in demand will be beneficial for short run, because the managers should realize that over time (i.e., in the “long run”) many new companies will be encouraged to enter the productive bottled water market. In the U.S. Perrier has experienced competition from Evian and others) based on the problem of quality control that negatively affected their sales. However, knowing the mechanism of supply and demand in the short run and long run, a decision can be made that because of the increase in competition which certainly faces successful companies in the long run, the management of Perrier should have carefully focused to control the purity and quality of their product.
3. For each of the following products, indicate whether you believe demand will be relatively price elastic or relatively price inelastic. Give economic reasons for each reply. Remember that high demand does NOT imply high elasticity. High elasticity occurs if a change in quantity demanded is relatively large compared to the associated change in price regardless of how high the quantity demanded is to begin with.
a. Mayonnaise in general
b. A specific brand of mayonnaise
c. Chevrolet automobiles
d. Tesla automobiles
e. Washing machines
Price elasticity is a measurement of customers’ sensitivity to supply and demand in relation to changes in price of a good or service. If a good or service elastic, small changes in price will cause large changes in quantity demanded. Example of elastic goods and services are motor vehicles, furniture, professional services, engineering products, transportation services. On the other hand, price inelasticity is a situation in which quantity of good or service is not affected when price changes. Thus, an inelastic good or service does not affect quantity demanded. Example of inelastic goods and services are electricity, gas drinks, water, food, and clothes.
a. Mayonnaise in general (Price elastic)
b. A specific brand of mayonnaise (price inelastic)
c. Chevrolet automobiles (price inelastic)
d. Tesla automobiles (price inelastic)
e. Washing machines (price elastic)
f. Beer (price elastic)
Essays, UK. (2013, November). Importance of Demand and Supply Analysis. Retrieved November 10, 2018, from ukessays: https://www.ukessays.com/essays/economics/importance-of-managers-understanding-supply-and-demand-economics-essay.php?vref=1
Mary Hall. (2018, January 16). Is Demand or Supply more Important to the Economy? Retrieved November 10, 2018, from investopedia: https://www.investopedia.com/ask/answers/040815/demand-or-supply-more-important-economy.asp