Microeconomics Essay Sample

Demand

Demand of a commodity is the quantity that consumers are willing and able to purchase at a given price at a certain point in time holding all other variables constant (Marshall, 2013). Increase in price leads to decrease in demand and decrease in price leads to increase in demand. For example, when the price of gas goes up, consumers of gas may decide to shift to other forms of energy or use other means of transport. A change in price leads to movement along the demand curve while a change in other factors like income, close substitutes, price of related good, exceptions to demand and changes in tastes and preferences lead to a shift in demand curve. Those two aspects can be depicted in the following diagrams.

Graph 1: Movement along demand curve

Price Demand curve
P1
P0

Q1 Q0 Quantity

Where:
P1, p0 – price
Q0, Q1 – quantity produced
Graph 2: Shift of demand curve
Price D0 D1 S
Income
Income
Q0 Q1 Quantity
Where:

P1, P0 – price

Q0, Q1 – quantity produced
D – demand

S - supply

Determinants of demand
There are five determinants of demand, namely:
Price – This is the price that consumers are willing and able to purchase a product. Every buying decision is based on the price of a product. The demand can be elastic or inelastic. Demand which is elastic arises when a small change in price leads to a large change in price. Example is gas. Inelastic demand arises when a small change in price does not cause a large change in quantity demanded, example of a luxurious car like Rolls Royce.
Income – Increase in income leads to increase in demand. When consumers have high income, they purchase more than when their income is little. Increase in income leads to impulse buying. For example one may step in to a supermarket with an intention of buying shopping worth 200 dollars, but because he has more money in the pocket, he may end up spending 500 dollars.
Price of related goods and substitutes – Because of its high consumption of oil, when the price of gas rises, the demand for Jeep vehicles reduces. For substitutes when the price of coffee rises, the demand for coffee substitutes like tea increases.
Tastes and preferences – When consumers tastes and preferences change, the demand curve shifts and the quantity of good purchased change. For example if taste of Nivea products increase, the quantity of Nivea products demanded rises compared to the other product similar products.
Expectations – If consumers anticipate an increase in the price of a commodity, they will buy more of that commodity now and hence increase in demand.

Supply

Supply is the amount of quantity that suppliers are willing to sell their products at a given price holding other variables constant (Marshall, 2013). A change in price leads to movement along the supply curve while change in other factors such as production cost, technology, number of suppliers and expectation for future price changes will lead to a shift in supply curve.

Graph 3: Movement along supply curve

Supply curve
Price
P1
P0

Q0 Q1 Quantity

Where:
P1, p0 – price

Q0, q1 – quantity produced

Graph 4: Shift of supply curve
Demand curve Supply curve
Price
P0
P1

Q0 Q1 Quantity

As the graph above depicts, increase in one of the factors which affect supply lead to decrease in quantity supplied. For example if wages are high, they increase the cost of production and suppliers will be willing to produce less quantity.

Determinants of supply

Production cost – if the production cost is high, suppliers will produce less of that product. Factors of production such as wages, taxes and other production inputs affect production.
Technology – Changes in technology such as use pf sophisticated machinery for production reduce the cost of production, hence more is produced.
Future expectations – If suppliers expect that prices will rise in the future, they will hold some goods in order to sell them at a higher profit in the future.

Surplus or shortage

Surplus supply arises when the quantity supplied is more than the quantity demanded. Demand shortage arises when quantity supplied is less than quantity demanded.

Graph 5: Surplus supply

Demand curve Supply curve
Surplus supply
Quantity demanded Quantity supplied
Graph 6: Demand shortage
Demand curve Supply curve
Demand shortage
Quantity demanded Quantity supplied
Efficient market theory
Efficient market theory is a theory that explains full information regarding the prices of securities. There is no case of information asymmetry because traders already have the knowledge about the prices in the market. In such a market, full productivity is experienced by investors and they are able to fetch high prices for their securities. Information is in the hands of all investors and hence no single investor can beat the market because all information is already in the security’s price (Marshall, 2013). Such markets include stock markets, bond markets and other security markets.

Reference

Marshall, A. (2013). Principles of economics.