Demand And Supply In The Canadian Economy Essays Example
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Markets comprise of buyers and sellers of particular goods and services. The behavior of consumers is dependent on demand curves. Demand for goods and services is as a result of buyer behavior. Sellers, on the other hand, determine the supply of goods and services. As such, supply curves are a reflection of sellers’ behaviors. In economic theory, the consumer prices would be a reflection of the real cost of goods and services in fully competitive market. The competitive market, in this case, represents a market with many buyers and sellers such that there is negligible impact on the market price from each of them. The theory holds that in such a scenario, the choices made by customers would endeavor to minimize wastage, shortages and surpluses. At the same time, this would allow for the optimal use of resources to satisfy market needs.
The quantity of goods or levels of services that any consumer would wish to pay for is dependent on a number of factors. They include; preference, income, age, substitutes, etc. The price of the particular commodity is also in itself a factor. The law of demand holds that customers will purchase a larger quantity of a product for low-priced commodities. The law, however, only holds when all other factors, such as income, remain the same. The assumption is quite important in economic studies.
Despite several factors having an influence on consumer purchasing behaviors, a demand curve only lays emphasis on the change in price per unit of a product with all other factors remaining constant. For instance, the demand curve may show the changes in prices per unit of a product, but the consumers’ income remains invariant. Such is a shortcoming of demand curve. In a standard setting, the income certainly determines the quantity of goods purchased by consumers. For normal goods, an increase in income translates to increased consumption of goods and services. For inferior goods and services, the consumption decreases with an increase in income. A good example of such a scenario is the case of public transport.
The price of related commodities also constitutes another factor that affects demand for goods and services. The related goods constitute of complements and substitutes. Complementary goods are those that are consumable together while substitute goods are those in which one is usable in place of another. The demand for complementary goods increases and decreases simultaneously. For instance, for two supplementary goods, hiking the price of one commodity results in a reduction in demand for the other. The vice versa is also true. In Canada, the energy industry serves as a classic example.
Reference case: End-Use Energy Demand by Sector
The demand for energy increases at a first rate in with low prices. The average annual rate has a projected value of 1.2% over the projection period. In the event of high prices, demand decreases to an estimated value of 0.8% annually. Agreeably, there is a downward pressure for growth of demand in the energy sector exerted by the high prices. The effect of the prices on demand, however, is offset by substitute sectors such as oil and gas sectors. For low prices, the demand is low whereas it is higher for high prices.
Just like the demand, supply also plays an important part in the commodity market analysis. With supply, the characteristics demonstrate the behavior of sellers in the production and sales of their products. The quantity supplied represents the amount of a particular commodity that sellers are willing to sell in the market. Understanding supply factors is, therefore, equally important in forecasting future supply expectations including the way in which they affect the market price.
The law of supply holds that an increase in the selling price will motivate sellers to increase the quantity of the particular product in the market. That, in itself, is a clear indicator of the positive relationship between supply and price. In addition to the price, several other factors affect the market supply. Some of them include; the number of other sellers supplying the same product in the market, price of inputs, technology, price of substitute commodities, and the weather. The argument in the law of supply is that an increase in commodity prices translates to greater profits that expand production. The increased production, as a result, satisfies the current demand for particular commodities or services. In the end, additional production calls for new demand. When the prices fall, there is the indication that there is a surplus in the market. Production slows down for demand to go up, and the cycle continues over and over.
When the demand for a particular service or product is high, and the supply is low, this leads to a shortage. One such example of such a scenario is the Canadian healthcare demand. In a previous analysis of the labor market conditions, the projections revealed a labor shortage in healthcare occupations expected to continue from 2013 to 2022. Increasing healthcare needs due to the aging Canadian population is bound to increase the demand for several healthcare services including healthcare professionals. The estimation is also that job openings due to retirements will supersede those from new creations. As such, high labor demand in healthcare occupations will exceed the expected supply. The main reason is that the expected number of school leavers who form the majority job seekers, will not adequately satisfy the demand and supply for the projected period thus creating the shortage. The situation will, however, be different depending on specialty.
Economically, when the quantity supplied falls below the quantity demanded, this creates an excess demand. On the other hand, when quantity supplied is above the quantity demanded, this creates an excess supply. Most firms in the market would want to manufacture commodities that satisfy the market demand without either surpluses or shortages. Such a scenario gets rid of excess costs related to inventory maintenance, keeping in mind that some of the commodities may never sell. Prices hike when there is excess demand, and they drop when there is excess supply. Equilibrium, therefore, results from the cancelation of the dynamic forces that change the price and quantity. At equilibrium, the amount demanded, and the amount supplied are equal. The price of a commodity at its equilibrium is the equilibrium price or the market clearing price.
In a free market economy, the markets achieve equilibrium solely as a result of the interaction between buyers and sellers in the market. At times, however, the market-generated prices do not auger well with public expenditure particularly when it comes to necessary products. In such times, the government comes in to regulate the market price in an effort to protect the public in matters of consumer expenditure on the related commodity. In order to enforce such regulation, the government uses price ceilings and price floors. Price ceilings are the maximum price amount limits set by the government such that a firm or an industry cannot charge any amount greater than the set price for its product or service. On the contrary, the price floor is the minimum set price amount below which a firm or industry cannot sell its product or services. The Canadian government sets the price floors for government wages. For instance, the minimum wage for a government official is above $10 per hour. Additionally, the government sets rent ceilings in an aim to regulate rental charges.
In a market economy, the prices signify a control mechanism for the allocation of scarce resources. The laws of demand and supply regulate the market prices. As such, the market price does not constitute the fairest price to all marketplace participants. The interpretation is that, the market price does not guarantee total satisfaction for all buyers and sellers. The individual competitive abilities of the participants in the marketplace dictate the level of satisfaction.
The Canadian economy borrows heavily from the laws of demand and supply. Consumers make attempts to capitalize on well-being amidst the presence of competitive constrictions. For a commodity whose price is low, consumer attraction follows because the low price profits the consumer. Likewise, firms and industries also aim to maximize their profits. High prices attract competition from similar potential firms within the market. It, therefore, follows that there will always be varying price levels for similar products or services that satisfy consumers and producers, and the aggregate produces the equilibrium price.
Brisbois, R., Orton, L., & Saunders, R. (2008). Connecting Supply and Demand in Canada’s Youth Labour Market. Pathways to the Labour Market Series – No|8.
Canada's Energy Future 2013 - Energy Supply and Demand Projections to 2035 - An Energy Market Assessment. (2013). Retrieved March 1, 2015, from https://www.neb-one.gc.ca/nrg/ntgrtd/ftr/2013/index-eng.html
Dibblee, G. (2014). Laws of supply and demand. S.l.: Book On Demand.
Mankiw, N., & Hakes, D. (2012). Study guide: Principles of microeconomics, sixth edition (6th ed.). Mason, OH: South-Western Cengage Learning.
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