In a market, the price is determined when the forces of supply and demand interact. The market price that results from this interaction remains dependent on supply and demand. Goods or services only change hands once the seller and buyer come to terms on the price. Once they agree on a given price, that price is known as the “equilibrium price.” Changes in supply and demand result in changes of the market equilibrium price for a particular product. This paper presents the concept of demand, supply, equilibrium and four factors that may lead to a change in market equilibrium for beefsteak.
Figure 1: The Law of Demand
When the price of a commodity is raised, people may opt for substitutes. Factors which may influence the choices of buyers are held constant. Changes in these variables may shift the demand curve (See figure 1) (Whelan and Msefer 6). Using beefsteak as the commodity, figure 2 shows what happens when the demand increases.
Figure 2: Demand increases (source: Lipsey and Harbury 76).
An increase in demand is accompanied by a rightward shift by the demand curve. If the consumer income increased or if the price of a substitute such as chicken increased, the demand for beefsteak would increase (Whelan and Msefer 6). This is accompanied by a rightward shift by the demand curve (Figure 2). If consumer income decreases or prices of substitute commodities reduce, the demand curve shifts leftward.
On the other hand, according to the concept of supply, the commodity price and the quantity of the commodity supplied are directly proportional. Producers will always look to supply at a price higher that the expenses incurred in production. The higher the price of the commodity, the more profitable it becomes for the supplier to supply the commodity (see figure 3).
Figure 3: The Law of Supply (source: Whelan and Msefer 6).
When other factors are held constant, the supply curve shows how the price of the commodity affects the amount supplied (Lipsey and Harbury 76). Factors that may cause the supply to shift left (decrease) include an increase in production costs, taxes etc. When the costs of production and taxes decrease, the supply curve shifts to the right (see figure 4).
Figure 4: Supply shifts. (Source: Economicsonline.co.uk)
The equilibrium price results when the supply and demand interact. There is a tendency for the price of the commodity, which in this case is beefsteak, to stop at a level demand is equal to supply. The equilibrium price is as shown in figure 5.
Figure 5: Equilibrium price (Source: futures.tradingcharts.com)
For example, assuming the equilibrium price, Pe, for a pound of beefsteak is Pe and the quantity supplied at equilibrium is Qe, if the price goes below Pe, the market would experience excess demand. If the beefsteak is sold at a price below Pe, the resulting excess demand exerts pressure on the price. This action results in a shift in price back to Pe (see figure 5). Market forces develop prices that push the demand to equal with the supply. At the resulting equilibrium price Pe, the actions of producers/ sellers and consumers/ buyers are in harmony (Hyclak, Geraint and Thornton 422).
There are four factors that will lead to a change in market equilibrium. These may be explained in terms of market adjustments when supply and demand change. These four factors are income of the consumer; prices of related commodities; information and input costs or resource prices. These factors have a bearing on the level of demand and supply of a given commodity. They lead to a disruption in market equilibrium. The first factor, consumer income, affects the beefsteak market as shown in figure 6.
Figure 6: Increase in demand due to factors (source: Drawn by self).
If the consumer income increases, consumers will buy more quantities of beef steak. As shown in figure 6, if the demand for beefsteak increases from 40 million pounds to 50 million pounds, for a constant supply, the equilibrium price will change from $8 per pound to $10 per pound. However, if the consumer incomes decrease, the equilibrium price will lower, leading to a new equilibrium point. The second factor that affects consumer demand is the price of substitutes. For example, if the price of chicken or pork decreases relative to that of beefsteak, consumers will opt to buy more of chicken or pork and less of beefsteak. This will lead to reduced demand. If the supply remains constant, the equilibrium will shift to a decrease in equilibrium price.
Changes in production/ resource costs impact the supply. For example, if resource costs for producing beefsteak increase, it will become less profitable to produce and the supply will decrease as shown in figure 7 from S1 to S2. This will lead to increased price. Equilibrium quantity changes from 40 million pounds to 30 million pounds and equilibrium price changes from $8 - $10.
Figure 7: Reduction of supply due to factors (source: Drawn by self)
The fourth factor is information. Information may affect both supply and demand. For example, if the prevailing information is that beefsteak has medical benefits, this will affect demand. Consumers will buy more quantities of beefsteak. At a constant supply, the equilibrium price will shift upwards. If the prevailing information is that beefsteak has negative health effects, the demand will decrease, and so will the price. Information may affect supply if a tax or increase in production cost will come into effect in the near future. Producers/ sellers may release more quantities of beefsteak. At a constant demand, this will lead to reduction in equilibrium price.
When the forces of demand and supply interact, the market price is determined. There are four factors which cause changes in supply and demand change in consumer income, rise of a competing product (substitute), information and the change in resource prices. When other factors are held constant, these factors may affect the equilibrium. This shows the interesting dynamics involved in a market when these factors interact with demand, supply and price.
Economicsonline.co.uk. "Shifts in supply." Economics Online. Version 1. Economics Online, 1 Jan. 2010. Web. 10 Feb. 2014. <http://www.economicsonline.co.uk/Competitive_markets/Shifts_in_supply.html>.
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