Supply And Demand
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Get Help Now!How a market price can increase and decrease in a commodity market
The market price of a commodity emanates from the interaction between supply and demand. Therefore, the market price is dependent on the changes of the two fundamental components that determine the selling price of a given commodity. The exchange price occurs when the buyer’s intent and the market price reaches equilibrium (MCEACHERN 2012). The exchange level is referred as the equilibrium price for the commodity under consideration. The aim of this paper is to discuss how a market price can increase and decrease in a commodity market following a ceteris paribus approach.
Equilibrium price
The graph represents the equilibrium price that the seller and buyer are willing to exchange in the market. The point of intersection between demand and supply represents the equilibrium quantity the consumer wants and the possible supply (MCEACHERN 2012). Therefore, the buyer is willing to offer a price of ‘p’ in exchange for ‘Q’ units at the point where demand and supply are at equilibrium. At price that is below P, the quantity supplied is below the quantity demanded. Therefore, the buyer is willing to buy more products that the supplier is not willing to supply hence causing shortage. As a result, the price increases in order to ration the shortage.
On the other hand, if the price was to rise above point ‘P’, then the market will be at surplus. The quantity supplied exceeds the quantity demanded hence buyers are willing to pay less in order to clear the market surplus. Therefore, the buyer is induced by the decreasing price to increase their purchases until the price reaches at point ‘P’.
Factors that influence demand and supply other than price
Thedemand and supply of a commodity is dependent on other factors that are referred as the determinant of demand and supply. The determinants of demand include income of the buyer, taste and preference, future expectations, and availability of a close substitute (MANKIW 2009). On the other hand, the determinants of supply include technology, natural conditions, inputs, cost of production, and government policies.
Shift in Demand
The changes in demand and supply may lead to a long term or short-term effect on quantity. The changes in taste and consumer preference tend to affect the market price in short term depending on the nature of the product. Luxury and necessity goods have different impact on demand and supply curves. Snob appeal products have a short-term impact on the demand curve while luxury goods have a stable change in demand (MANKIW 2009). Therefore, from the figure above, a positive change in customer preference may cause the demand curve to shift from D1 to D2. The shift cause an increase in quantity demanded from Q1 to Q2. AT THIS POINT, the demand exceeds the quantity supplied hence causing an increase in price from P1 to P2 hence creating a new equilibrium at the intersection of D2 and S.
Shift in Supply Curve
The determinants of supply cause the supply curve to shift to the right or left depending on whether they are favorable or adverse. For instance, the rising cost of production, unfavorable government policies, negative climate change, and insufficient inputs causes the supply curve to shift to the left. From the figure above, the rising cost of production will cause the supply curve to shift from S to S1 leading the quantity supplied to decrease from Q to Q1. Therefore, the demand becomes high hence exceeding the quantity supplied (MANKIW 2009). The change causes an increase in price from P to P1 to reach a new equilibrium point.
Bibliographies
MANKIW, N. G. (2009). Principles of economics. Mason, OH, South-Western Cengage Learning.
MCEACHERN, W. A. (2012). Economics: a contemporary introduction. Mason, OH, South-Western Cengage Learning.
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