Supply And Demand Research Papers Example
Using standard economic theory we can define demand as the quantity of goods and services that consumers want to buy at different prices. This definition of demand is based on the assumption that, all other factors that affects demand remains constant when we consider the effect of price on the demand for any good or service. To put it more simply, we know that demand is affected by a number of factors like price of the product, the income of the individual, the price of other related products, the consumer’s tastes and preferences, and even government policies. When we want to study the effect of price on the demand for a particular good or service we assume that all other factors that influence demand have remained unchanged. Only the price has changed. If the price of the product changes, other things remaining constant, we will find that the demand for the good falls as the price increases and the demand increases as the price falls. If we record the quantities of a good (say X) demanded at different prices we will get a schedule as shown in table 1. We can plot the schedule graphically which will give us demand curve as in figure 1.
Supply, in economic terms, is defined as the quantity of a good or service that the sellers are willing to sell at different prices of the commodity provided that the other factors affecting supply remains unchanged. Let us explain this economic term in simple terms. The supply of a commodity is affected by a number of factors like the cost of inputs, the production technique, government policies, etc. We can find the relationship between the quantity supplied and the price of a commodity by keeping the other factors affecting supply unchanged. The quantity supplied at different prices can be represented as a schedule as given in table 2. The graphical representation of the supply schedule gives us the supply curve which is shown in figure 2.
Let us now study the economic theory related to demand in terms of a real life commodity. For this we choose Hershey’s chocolate candy. We consider how the demand for Hershey’s chocolate candy varies under different circumstances from the King Sooper’s store.
Demand for Hershey’s Chocolate Candy
In this section we discuss some of the factors affecting the demand for Hershey’s chocolate candy.
Income: We can find from our observation of demand for Hershey’s candies that the demand is positively related to income of the consumers. As the income increases the demand for the good increases. This implies that it is not an inferior commodity. It is a normal good.
Price of the commodity: The demand for the good is negatively related to the price. Chocolate candies are not necessities but they are comfort foods. So the demand is expected to be moderately elastic.
Price of the related commodity: To find how the demand is affected by the price of the substitute we consider the price of M&M’s chocolate candy. We find that the as the price of M&M’s chocolate candy rises the demand for Hershey’s chocolate candy rises. There is a positive relationship between the price of the close substitute and the demand for the product in question. There are also some commodities that are consumed along with chocolate candies. For example, chocolate candies are often used as toppings for ice creams, cakes and the likes. If the price of savory cakes fall, the cakes will be more in demand, the demand for chocolate candies will rise in turn. So, there is a negative relationship between the price of the complement and the demand for the product.
Market Structure: The market structure for chocolate candy is characterized by monopolistic competition. We have found that the two major competitors, the Hershey’s and the M&M offer a variety of products with attractive packaging and innovative looks, tastes and flavors. The firms earn considerable profit in the short-run. In the long-run there is a possibility of the profit to come down to the normal level unless the firm continues with product innovation and sales promotion activities to maintain its market power.
The Macroeconomic Situation: We know that under a situation of monopolistic competition the firm earns normal profit. During a recession both income and price levels are on a phase of retardation. When the price level falls during a recession, the firms tend to incur losses. In addition to that, the fall in income will reduce the demand for the firm’s product as it is a normal good. The firm will continue to carry on with its operation so long as it can cover its variable costs. This is known as the ‘break-even’ situation. The firm will shut down its operation if it cannot even cover its running costs. In this case it reaches the ‘shut down’ point. If the firm can break even under present situation, in the long-run it can expect to earn profit. As the recovery begins, in the long-run, the prices and income tend to rise. As it reaches the average cost of production, the firm starts earning normal profit. If the firm can increase its market share, it can earn super-normal profit when the economy is in the situation of boom.
Seasonality: The demand for some commodities depends to a large extent on the change of seasons. The demand for umbrellas is high in the rainy season. The demand for chocolate candies also increases during the time of festivities like Christmas, New Year and Easter.
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