Theoretical Concept Chapter 3: Basic Elements of Demand and Supply Demand and supply are factors which lay the building blocks for almost all other chapters that are covered in economics. Demand simply put, is how much of a good is required by the buyers at a specific price. The quantity of good demanded is determined by the demand curve which is generally a downward sloping curve. The demand curve tells us that ceteris paribus (all other things remaining constant), the demand of a product increases as its price falls down and vice versa.
The simple logic behind this rationale is lower prices mean that people can now buy more from their money and therefore their demand would increase. There are many factors which determine the demand of a product. The main ones of them are the good’s own price, the price of related goods (substitute as well as complementary goods), the level of disposable income, customer taste and/or preference, their expectations and in some cases weather as well (consider ice cream and how its demand soars up in summers and falls down drastically in winters). A demand curve also shifts from its actual position.
A shift in demand curve is experienced when at the same price level, buyers are willing to buy more or less of a produce then they previously were ready to. A shift is caused by the same factors mentioned above. To explain it let’s just see how an increase in disposable income would bring about a change in the demand curve. An increase in the level of disposable income would simply mean that now the buyer has more money to spend on his purchases.
Ceteris paribus, this would mean that now he would demand more of the goods as the same price level as before and thereby one would witness what is called an outward shift of the demand curve. Supply on the other hand refers to how much of a good a seller is willing to sell at a specific price level. The quantity of goods supplied is often determined by the supply curve which generally is an upward sloping curve. The demand curve tells us that ceteris paribus, suppliers would be willing to more quantities of goods at higher prices and lower quantities when the prices are low.
This could be understood very easily as the main aim of a supplier is to air for maximizing his profit levels. This aim could easily be achieved when more goods are sold at higher prices as compared to selling smaller quantities of goods as lower prices. There are many factors which play a pivotal role in determining the supply of a project. The price of the good itself is an important factor determining supply alongside, the price of related goods (both substitutes and complementary goods), conditions affecting the production of goods, seller’s expectations (if the seller feels the demand for his product will increase then he would react by increasing production), the prices of material input, the number of suppliers of similar product in the market and last but not least governmental policies (including taxes, regulations, tariffs, subsidies etc. ). Demand and supply are said to be in equilibrium when the demand of a product matches its supply.
To put it more simply, equilibrium is achieved when the demand and supply curves intersect each other.
The intersection of the curves gives us the equilibrium level which tells how much goods would be bought and sold exactly and at what price level. The price at which equilibrium is achieved is often referred to as the market clearing price. The equilibrium level will obviously not change until the demand and/or supply curve change of course. A further concept can also be understood by the help of consumer equilibrium concept. Let’s say consumer equilibrium is achieved at a price of $0.35 and 10,000 units.
If the price then rises to let’s say $0.40 then the suppliers would be willing to offer a greater quantity of good then 10,000 whereas the demand would go below the equilibrium level of 10,000 units. This case could be completely reversed when the price falls below equilibrium level. In such a case the demand for the product would outweigh the supply. Research In this case study we look at the demand for organic foods compared to the local supply. The demand for organic foods throughout the years has risen sharply.
According to the one of the researches conducted, the demand for organic foods has been rising at a staggering rate of 20 percent per year. If just the case of the USA is taken into consideration, it was once a very good player in the international market for supply of organic food. However, as the demand for organic products increased, it has been importing organic food in large amounts. Statics show that the ratio of organic food imports to exports in the United States alone is 8:1.
Statistics have also shown that due to this demand supply mismatch the prices of organic food have increased dramatically over the years. Consequently the demand for other types of food has fallen down by a slightly little margin, thereby leading to a decrease in their prices. However in the recent times due to the recessionary pressure, the demand for organic food has slightly gone down as in these difficult times customers have cut down on their premium priced organic food and vegetables.
Demand for organic foods also changed as a recent research came up with some interesting facts regarding organic foods. According to a recent report there are no important differences as far as nutritions are concerned. The report also further mentioned that organic food doesnt really have any additional benefits as compared to other forms of food. At the time of publication of this report a significant fall in the demand of organic products was observed and consequently its price also fell down. The fall in the demand for organic products can be seen as a perfect example to show how the overall market demand of a product is altered as a result of a downfall in the economy and/ or other health related factors. References "The Push and Pull Towards Organic: Clarifying the Roles of Health Consciousness, Food Safety Concern and Ethical Identity. " Michaelidou, N and Hassan, L M (2008) the Push and Pull Towards Organic: Clarifying the Roles of Health Consciousness, Food Safety Concern and Ethical Identity.
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