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head: Running SUPPLY AND DEMAND AND PRICE ELASTICITY PAPER 1 Supply and Demand and Price Elasticity Paper Garret Lecat Garrett Schaefer Amir Nia University of Phoenix Principles of Economics 212 Karl Bitter March 14, 2010 Supply and Demand and Price Elasticity Paper Herbert Hoover once said Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body- the producers and consumers themselves (WorldofQuotes.com, n.d., para. 6). Economics is the study of trade between producers and consumers. The following paper will explain the cause of changes in supply and demand, describe influences in market equilibrium, address price elasticity, and define the roles of economists within market systems. When one thinks about what can cause changes in the demand for a good or service, there are many factors that can influence a change. The law of demand states, an increase in price the quantity demanded is lower (Economics with Steven Tomlinson, 2007). One could make the correct assumption that when price decreases the quantity demanded is higher. There are many different factors that influence a shift or change in the demand of a good or service. For example, substitution, complimentary goods, income, and changes in consumer expectations all have an influence on the change of demand (Mankiw, 2007). When these variables change, the variable effect the quantity demanded thus making a change in demand. When one variable either rises or falls one can correctly assume the reverse outcome of each variable will be true. Market demand is individuals household demands added together to make a market demand (Economics with Steven Tomlinson, 2007). The market demand changes with each change in individual demand. There are numerous changes in demand due to all the variables that reflect demand. Supply, like demand, is also changed and shifted with differentiating variables that influence the quantity supplied. When profits are larger the quantity supplied rises, also the reverse is true, and if profit gets smaller the quantity offered is less (Economics with Steven Tomlinson, 2007). For instance, if a companys opportunity costs are smaller than the revenue gained, profit will be made and companies will supply more. When the supply raises opportunity costs rise complimentary to the rise in supply. The law of supply claims that, other things equal, the quantity supplied of a good rises when the price of a good rises (Mankiw, 2007). The variables that influence supply change include, price inputs, technology, government influence, and expectations (Economics with Steven Tomlinson, 2007). When the opportunity costs, price, and supply fluctuate and change due to the effect these variable play on supply. Opportunity costs rise because the costs to supply more in intertwined with opportunity costs, one must be paid more to supply more in any case because it costs the supplier more to make more. Changes in supply occur when ceteris paribus has changed, and there is a new relationship being displayed in price and quantity supplied. Supply and demand will always cross at a point somewhere in the market and the change of supply and demand will change where those two meet. Market equilibrium refers to a situation in which neither consumers firms nor have any incentive to change their behaviors (Economics with Steven Tomlinson, 2007). Price in market equilibrium occurs when demand equals supplied. A bidding mechanism is the process by which unsatisfied buyers try to change the price of a good in order to guarantee that they are able to obtain it (Economics with Steven Tomlinson, 2007). If quantity supplied is low the bidding mechanism will come in and drive price up so consumers can obtain it and once the demand and supply meet there is a new equilibrium. Price and quantity are greatly affected by the changes in supply and also in demand, thus changing the equilibrium price right along with it. The quantity of demand rises when goods or services are offered at a lower price. Price elasticity of demand also explains, The rate of response of quantity demanded due to a price change (Moffatt, 2009, p. 1). When the price of products increase, then most consumers choose something else to buy that is more affordable. For example, as the price of gas goes up, consumers look for alternate forms of fuel, such as ethanol, propane, or electronic. Price changes in relation to demand when a good or service has many substitutes. In the marketplace, the variety of substitution can cause better price elasticity than demand. Competition in the market causes prices to be more flexible for the consumer. Economists use the word competitive market to describe a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price (Mankiw, 2007, p. 64). In todays market, an economist has one of two roles. He or She can act as a scientist and study the effects of variables in the theory of economics. With the knowledge learned, societies can attempt to improve the transactions between buyers and sellers. The economist can also act as an advisor for a business or government. He or She uses the current theories available to improve functionality or solve a problem their organization faces (Mankiw, 2007, p. 1-3). Economic scientists use two models to examine micro and macro economics within market systems. The first is the circular flow diagram. This is a representation of how trade works between households and firms. The second model is the production possibilities frontier. This a graph used to predict how much of a good or service an economy can produce given the technology and resources available to them. Scientists use facts and proven theories, (positive statements). Economic advisors use market prediction and critical thinking, (normative statements),(Mankiw, 2007, p. 28). Economics is a fundamental aspect of any society. Without the trade of goods and services, order could not prevail. Supply and demand, market equilibrium, and price elasticity are all key concepts in the study of economics. Scientists and advisors use these concepts to contribute to the current state and the prospective future of their organization or government. References Economics with Stevin Tomlinson(2007). [Motion Picture] Mankiw, N. G. (2007). Principles of Economics,(4th ed.). Mason, OH: Thomson Learning, Inc. Moffatt, M. (2009, ). The Price Elasticity of Demand . Message posted to http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm WorldofQuotes.com. (n.d.). http://www.worldofquotes.com/topic/Finance-andEconomics/index.html ... View Full Document

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