Effect of Price of the Factors of Production on the Supply Curve - Essay Example

Demand and Supply Name: Institution Introduction Demand Demand refers to the amount of goods the consumers are willing to buy at a given price over a given period (Hoover, 2001). The law of demand (Hoover, 2001) states that there exists an inverse relationship between the price of a product and the quantity demanded ceteris paribus. Demand for a product is affected by several factors including; Availability of Substitutes Substitutes are products that can be used in place of another product (Hoover, 2001). A change in price of one good directly affects the market of another related product. Existence of imported berries in Australia results into a decline in the demand of the local berries in Australia, shifting their demand curve to the left Quality of a Product The quality of a product (Hoover, 2001) affects its market demand, for instance an increase in the quality may result into an increase in the market demand for a particular product and a decline in the quality of a product may result into a decline in the market demand. If the local producers increase the quality of their berries, more will be demanded. As a result the demand curve will shift to the right. Advertising Consumer awareness affects market demand for a product. Advertising can increase consumer’s loyalty towards a particular product (Hoover, 2001). An increase in loyalty results in an increase in the market demand for a particular product for example creating more awareness to the consumers on the existence of local berries, while lack of awareness of the existence of a particular product causes a decline on its demand. An increase in loyalty will increase the demand of local Australian berries thus shifting the demand curve to the right. Quantity Demand The quantity demanded (Hoover, 2001) of a product is affect by price. A change in price results into a change in the quantity demanded. For instance, a fall in price from $20 to $15 increases the quantity of berries demanded from 10 units to 15units, and an increase in price, from $10 to $15 results into a decrease in quantity of berries demanded from 20 units to 15 units. Supply Supply refers to the amount of goods sellers are willing to make available in the market at a given price over a given period (Hoover, 2001). The law of supply, (Hoover, 2001) states that, there is direct relationship between the product price and the quantity the suppliers are willing to sell over a given period, ceteris paribus. Factors Affecting Supply The Price of the Factors of Production The rise in the factors of production causes a rise in the cost of production. An increase in the cost of production causes a decrease in the supply and a decrease in the cost of production causes an increase in the supply (Hoover, 2001). For example according to Mr. Casey, Australia imports more berries because the cost of producing local berries is too high. Countries that export berries to Australia are argued to use a fraction of the cost of production Australia uses to produce its coffee. Effect of Price of the Factors of production on the Supply Curve An increase in the price of factors of production makes the supply curve to shift to the left from S0 to S1, due to increased cost of production. A decrease in the cost of production due to a decline in the cost of factors of production makes the supply curve to shift to the right. An high cost of producing berries in Australia makes the berries supply curve to shift to the left, since are not in a position to supply more berries. Factor affecting Quantity Supplied The quantity of a product supplied in the market by the producers is affected by the price of the product (Hoover, 2001). For instance, an increase in the price of a product results into an increase in the quantity of a product supply while a decline in the price of a product causes a decline for goods supplied in the market. Movement along Supply Curve Movement along supply curve is caused by changes in price of the product. An increase in the price of a product causes an upward movement in the supply curve while a decline in the price of a product causes a downward movement along the supply curve. For example in the diagram below, an increase in the price of berries from $20 to $40 causes movement along the supply curve from points C to A, an indication that suppliers are willing to sell more berries at a higher price. On the other hand, a decline in the berries price from $40 to $20 results in, movement along the supply curve from points A to C, an indication that suppliers of berries are willing to supply less at lower prices. Combined Effect on the Market Equilibrium Market equilibrium occurs at the point where the quantity of a product demanded equals its price (Hoover, 2001). In the diagram below, D1 and S1 represent the original demand and supply curves respectively. The shifted demand and supply curves are D0 and S0 respectively. The original market equilibrium is represented by point E0 while the equilibrium as a result of shift in demand and supply curves is represented by point E1. Availability of substitute berries in the Australian market shifts the demand curve to the left. Increase in the cost of production shifts the supply curve to the right. These changes results in to s change in the equilibrium point from E0 to E1. As indicated in the diagram, this is a decline in the equilibrium point, an indication that less berries is supplied by the local producers in Australia. Conclusion The change in the price of a product for example berries causes a movement along its demand curve and supply curve. The berries own price affects its quantity demanded. Non-price factors such as availability of substitute berries, change in its quality, cost of production, change in technology and advertising affects demand and supply of berries. A change that favors production of berries causes the supply curve to shift to the right whereas unfavorable change makes the supply curve to shift to the left. A rightward shift in the demand curve is caused by non-price factors that favor demand while a shift to the left is caused by unfavorable non-price factors. Shifts in supply and demand curves change the market equilibrium. Reference Hoover, W. E. (2001). Managing the demand-supply chain: Value innovations for customer satisfaction. New York: John Wiley Read More