Microeconomics Term Paper (Term Paper Sample)

ECONOMIC FACTORS AFFECTING DEMAND AND SUPPLY OF COMMODITIES AND THE RESULTANT PRICE.
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Course Title: Microeconomics
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11th January 2015
Table of Contents Page TOC \o "1-3" \h \z \u 1.1 Economic Factors Affecting Demand for commodities PAGEREF _Toc431222639 \h 31.2 Economic Factors affecting the supply of commodities PAGEREF _Toc431222640 \h 81.3. Resultant product prices. PAGEREF _Toc431222641 \h 111.4.Application of the Demand-Supply Mechanism PAGEREF _Toc431222642 \h 131.4.1.Demand and Supply of Fuel PAGEREF _Toc431222643 \h 131.4.2. Demand and Supply of Water. PAGEREF _Toc431222644 \h 171.4.3Emerging Issues PAGEREF _Toc431222645 \h 18
Question 1a
Identify and explain the main economic factors that affect the demand for a product; the supply of a product and the resulting product price.
1.1 Economic Factors Affecting Demand for commodities
The demand of product varies according to some given elements. Factors affecting demand are categorized in price and non-price factors. Price factors include the price of the commodity that has a direct influence on the demand for a given product. Non-price factors include other factors that do not affect demand directly through the altering of the price. Price factors will cause a movement along the demand curve while non-price factors will be indicated by a shift in the demand curve.
Price factors.
* Own Price.
Arguably enough, it is the most important factor affecting the demand for a given commodity. As the rule of the thumb, an increase in price of a particular product results to the reduction in the demand of the product ceteris paribus. Hence, there exist an inverse relationship between price and quantity demanded. The relationship is known as the ‘law of demand’ (Buchholz & Todd 1995). From this relationship, a mathematical equation linking both price and demand can be derived, and it is as follows:
D=f(P)
Where:
D- Demand for the product
P- Price of a given product.
As seen from above, demand is a function of price. The equation defines the change in demand. As a result, in the change in own prices of the product.
190500263525Individual demand curve
P
P3
P2
P1 D
Q1 Q2 Q3Q
Where:
P- Price Q- quantity demanded
Increase in demand is indicated by an upward move up the demand curve while a decrease in demand is indicated by a downward move down the demand curve. Increase in price of the product lead to the decline in quantity (q) demanded.
Non-Price Demand factors.
* Changes in prices of related goods.
* Complementary products.
These are products that are used together to the satisfaction of a particular want. A good example is car and fuel. The increasing price of a complementary good leads to the decrease in demand for a given commodity. The vice-versa is true. This is because the additional products becomes expensive and unaffordable by the buyer. It is known as joint demand.
* Supplementary goods.
They are also known as substitutes. These are products that can be used in place of other goods for the satisfaction of particular need. An excellent epitome is tea and coffee. Increase in price of a substitute good leads to the rise in demand for the cheaper product (Hubert 2004). There is hence a direct relationship between demand and the price of a substitute good.
* Income of the consumer.
Demand is also affected by the change in income of the consumer. The higher the income of an individual, the greater the demand for goods and services. The reason for his is that higher wages increase the purchasing power of individuals and hence their budget set also increases. People can buy more products with higher incomes. However, the effect of the change in demand depends upon the nature of the commodity depends upon the nature of the product.
* Standard/normal goods: An increase in income of an average product leads to the rise in demand of the product.
* Inferior goods: An surge in the income level of an individual leads to the decrease in the demand for the good while as a reduction in income leads to the reduction in demand level.
* Customer tastes and preferences.
According to Pindyck, Robert & Daniel, (1992) postulated that the extent, to which a consumer is biased towards a particular good, will determine its demand. When a commodity is in fashion or is preferred by a consumer, the demand for such a product will increase greatly. The demand curve for the product will tend to lie at a high level. On the likewise, if the customer had no regard to the product, the demand for such a product will decline in case the customer had no taste and preference for it. Other factors affecting tastes and preference apart from fashion include pressure from advertisements from manufacturers and sellers.
* Future expectation of changes in price.
In case the consumers anticipate the increase in price of a given commodity, people will buy the product in bulk above average purchases in order to evade buying the commodity in the future at a higher price. There is, therefore, a direct relationship between future expectations of changes in price and the demand. A good example would be the expectation of future increase in price of petrol. Many consumers of the product will fill their tanks with petrol in order to avoid purchasing gasoline in the future at a high price.
* Economic state of the commodity.
Some products such as the umbrellas are seasonal, and their demand varies according to the prevailing conditions. During boom seasons characterized by economic prosperity, investment, employment and income increases. The implication of this is to increase the demand for capital and consumer goods (Langabeer & Jim 2000). However, in periods of depression, low investments and income lead to decline in the market level.
* Population size and composition
2000251195705Increase in population lead to increasing the demand level. Additionally, if the population is composed of a significant target group such as youngsters, adults, women, men, or is dominated by a particular gender say men or women, the increase in population of the target group will lead to the rise in demand for that product.
P
S
P2
P1
D2
D1
Q1 Q2Q
From the diagram above, an increase in the demand curve will be shown by a shift to the right while a change will indicate a decline in the demand level to the left., it is only the changes in own price of product that will cause a movement along the demand curve. All the other factors including changes in price of related products, customer preferences and tastes, income of the individual result to a shift in the demand curve.
1.2 Economic Factors affecting the supply of commodities
Supply may be best termed as the quantity that suppliers wish to avail of the market at a given price. A rise in the price of the product leads to an increase in the amount supplied in the market. The price of a product has a direct relationship with the provision of the good. This is known as the ‘law of supply’. Reduction in cost of production will motivate the supplier to offer more quantities into the market. Supply is, therefore, a function of price, and it is expressed mathematically as follows:
S=f (P)
Where:
s- Supply of a given commodity
p- Price of the commodity
Factors affecting supply of the commodity
Price factors.
Price factors are shown by a movement along the supply curve.
* Price of Commodity
An elevation in the price of the product leads to rise in the amount supplied in the market. The converse is true (Buchholz, M & Todd G 1995)
25774953829
S
P
Q
An increase in the price of the commodity will lead to an increase in the quantity supplied. This is shown by an upward move along the supply curve.
Non-price factors
These factors are represented by a shift in the supply curve.
* Price of other related goods.
An increase in the price of a similar commodity will lead to an increase in supply of the production. In case it is more profitable offering the product than supplying another commodity, producers will tend to prefer to provide the good with the higher price tag.
* Change in cost of production.
Increase in any factor of production will result in a decrease in the supply of the commodity. The reduced profits brought about by increase in cost of production will prompt producers to offer less in quantity of a particular commodity. Heilbroner et al., (1994) put forward the argument that suppliers use inputs in order to produce outputs. The inputs in production include raw materials such as labor, utilities, licensing fees etcetera. When the price of a given input increases, the cost, as well as the price of the product will increases.
* Technological advancement
Technical progress results in the lowering of the cost of production and hence increased profits for the producer. The producer will hence tend to supply more of the product in the market.
* The Weather changes.
Agricultural products are the most affected commodities since their produce is greatly determined by climatic conditions. When the weather is favorable, producers will tend to increase the production of agricultural products and vice versa.
* Number of producers.
An increase in a number of manufacturers in the market will lead to a rise in supply since each manufacturer is bringing in an additional product into the market.
* Government subsidies.
Increase in government grants leads to a decrease in cost of production. Consequently, a decline in production costs leads to the rise in supply and hence a shift towards the right.
25717541275S
P1S2
P2
D
Q1 Q2Q
1.3. Resultant product pr...