Supply and Demand
Date of Submission
Introduction and Over View of the Study
In economics, demand refers to the consumer’s desire, their ability and their willingness to incur a price in order to have a product or a service(Azar, 2014). On the hand, supply refer to the amount of product or service units that a firm is able to produce and offer to a particular market for consumption(Kotler, Burton, Deans, Brown, & Armstrong, 2015). A market is where the exchange of the goods and services take place between consumers and the suppliers(Gwartney, Stroup, Sobel, & Macpherson, 2015). The two are some of the greatest forces that influence the situations in a market.
This study therefore seek to evaluate several market scenarios and use graphs to illustrate the expected situations in relation to all factors that are important basing model of supply and demand. Each scenario is discussed separately from others and the normal assumptions of the laws of supply and demand in a market are used together with their determinants. In this study, the scenarios are made basing on 240- Foot Industrial Wind Turbines.
Using model of supply and demand to analyse various market scenarios
“A technological advance reduces the cost of production for industrial wind turbines”
Through technological advances, the cost of producing industrial wind turbines reduces hence the producer firms are able to increase the number of units they can supply in to the market. The law of supply and demand suggests that, when the supply increase, prices drop and when prices drop, the demand increase(Baumol & Blinder, 2015). Therefore, the expected curve for demand and supply with prices dropping is as illustrated below;
“The number of consumers of industrial wind turbines increases, because more firms in private industry are buying wind turbines to generate power for themselves; in addition, a larger number of public utility companies are buying wind turbines as a greener source of electrical power.”
Increase in number of consumers illustrates and increase in demand for the wind turbines. According to the laws of supply and demand, when demand increase in a normal market, the prices increase. This can be illustrated by a graph as below;
“Suppose natural gas is a form of energy as a consumer substitute for industrial wind turbines as a source of power (as compared to industrial wind turbines). What change is predicted in industrial wind turbines if the price of natural gas energy decreases?”
In a situation where the consumers have an alternative substitute product, like in this case where natural gas can be used to substitute wind turbines, a decrease in the cost or supply prices of an alternative product causes a drop in the demand for the other product. In this case, the drop in natural gas energy prices will result into a drop in the demand for wind turbines.
“Suppose a government subsidy that had been available to the producers of wind turbines is completely eliminated, and the cost of producing wind turbines rises, as the government subsidy is taken away. Predict the change in the wind turbine market caused by the removal of the subsidy.”
The subsidy causes the cost of production of the wind turbines to drop. Eliminating the subsidy causes the cost of production of the wind turbines to increase. Increase in the price of production increases the price of selling the products in the market.In a normal market situation, increase in prices of commodities causes a decrease in its demand.
“Assume steel is a resource used in the production of industrial wind turbines. If global steel prices decrease dramatically, predict the impact. Does the supply or the demand for industrial wind turbines change? Why? What is the direction of change? Why?
A decrease in steel prices will directly reduce the cost of producing wind turbines. This will increase the ability of the wind turbines producers to supply more units of the products to the market. According to the laws of supply and demand, an increase in supply causes a decrease in prices which in return increases the demand for the products in the market. The curve of demand and supply will be illustrated as below;
“Suppose the entrepreneurs who make and sell industrial wind turbines have the technological capacity to readily changeover their production operations to produce smaller residential wind turbines. If the price and profitabilityof producing residential wind turbines increase, what is the impact on industrial wind turbines?”
The ability of the entrepreneurs to produce residential wind turbines increases their demand for the products. However, according to the laws of supply and demand, in a normal market, an increase in the prices of the wind turbines will cause a decrease in the demand for the products in the market. This can be illustrated as below;
Using the model of Supply and Demand to make predictions on changes in the equilibrium price and the equilibrium quantity of corn
“Suppose above-normal growing conditions (near-perfect weather, ideal soil moisture, no pest infestations, etc.) create a bumper crop of corn. Use supply-and-demand to predict the impact of the bumper crop on the equilibrium price and equilibrium quantity of corn.”
A bumper crop is a crop that yields very high levels of harvest than the expected volumes. Such a case causes a high supply which in return causes prices to drop. According to laws of supply and demand, the drop in prices causes the demand for the products to increase as consumers can afford to buy products.
(EQ) Units Sold
In the case above, more suppliers enter the market due to high demand. The intersection between the demand and the supply curves is the equilibrium. The actual change between the normal and above normal growing conditions involves increased supply which in return increases the demand for the corn due to lowered prices. The predicted model results are similar to that of other commodities. This is the case because the corn operates in a market environment that is affected by other factors such as competition, ability of customers to buy and the willingness to buy products.
“Suppose corn is a viewed as a normal good from the consumer household income perspective. If a worldwide recession reduces household consumer incomes on global scale, use supply-and-demand to predict the impact of decreased consumer income on the equilibrium price and equilibrium quantity of corn.”
A worldwide recession that reduces the household consumer’s incomes reduce the ability of consumers to pay for the corn. This therefore reduces the demand for the products in the market. A decrease in demand leads to a decrease in supply. This will cause the equilibrium price and the equilibrium quantity of the corn to decrease.
Supposing the corn market is impacted by multiple force and the supply and demand analysis is required, this would cause the equilibrium to shift from the current prices and qualities. Depending on the forces, the equilibrium may shift to cause a price rise and a fall in demand or a price drop and an increase in the demand.
“In this scenario, suppose that an increased number of corn consumers enter the corn market because they are purchasing corn to meet a growing demand for corn-based ethanol.”
In this case, an increase in consumers means and increased demand. When the demand goes high, the prices for corn will also go high. This will therefore see an increase in the supply for the product as more suppliers seek benefit from the market situation. Here, the equilibrium will shit to have a high optimal price and a high optimal quantity.
Units (E Q)
“Simultaneously, the US Department of Agriculture increases subsidies for corn production, in an effort to support/stabilize farm income.”
Subsidies from the government will enable the producers to increase the volume of supplies which in return will lower the prices of the commodities. Lower prices will increase the demand for the products. This will lower the optimal price at equilibrium and increase the optimal quantity at equilibrium.
“Suppose corn producers can readily change-over their operations to produce soybeans instead. Assume it is simple for a producer to grow corn or soybeans on a piece of land the producer simply decides to change the crop in the next growing season.”
If the cord producers chose to change the crop to soybeans in the next growing season, that indicates a direct decrease in the supply for cord in the consumer market. According to the laws of supply and demand, a decrease in supply will cause an increase in prices which in return will decrease the demand for the corn. The expected impact is a rise in the equilibrium price and a decrease in the equilibrium quality.
In addition to this, assuming that there is notable increase in price in the production of soybean,the supply prices at the consumer markets to increase. An increases in price for the products will cause the decrease in demand for the products. This will therefore mean an increase in the equilibrium price and a decrease in the equilibrium quality. The producer’s reaction to produce soybeans instead of corn will cause a shortage if corn supply which will in return increase the price of corn. This will reduce it consumptiondemand and lead to the increased equilibrium price and decreased equilibrium quantity.
Azar, O. H. (2014). Optimal strategy of multi-product retailers with relative thinking and reference prices. International Journal of Industrial Organization, 130-140.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and Policy. Boston MA: Cengage Learning.
Gwartney, J. D., Stroup, R., Sobel, R. S., & Macpherson, D. A. (2015). Macroeconomics : private and public choice. Stamford, CT : Cengage Learning.
Kotler, P., Burton, S., Deans, K., Brown, L., & Armstrong, G. (2015). Marketing. North West Shelf: Pearson Higher Education AU.