Characteristics of Supply and Demand

CHARACTERISTICS OF SUPPLY AND DEMAND 5

Characteristicsof Supply and Demand

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Thelaw of supply

Thelaw of supply is the basic principle of the economic theory. The lawof supply dictates that when all other factors are constant, anincrease in commodity price lead to increase in quantity supplied. Ina broader sense, any price increase in a given commodity or service,leads to more supply of a particular commodity. There is a directcorrelation between price of a commodity and supply quantity.

Whythe supply curve slopes upward

Thesupply curve slopes upward to reflect the higher prices needed tocover the marginal cost of production. The upward sloping of supplycurve is explained through the law of diminishing marginal returns ormarginal productivity. As more units are employed in the production,productivity declines. Increased productivity leads to decreased unitcost of products.

However,as the price of commodities increases production and supply of commodities also rises. The higher the price of products or servicesthe more production is increased(Mankiw and Taylor, 2011).Producers and suppliers are willing to supply more commodities athigher price than when price are low the law of diminishing returns.Hence the supply curve slopes upwards as price per unit costincreases so is the number of units supplied.

Insummary, the supply slope curves upwards because quantity suppliedincreases over time, as more is produced, total cost of productionfalls.

Howmarket supply curve is derived from the supply curves of individualproducers

Themarket supply curve is derived from the supply curve of individualproducers based on the specific unit prices offered per unit ofproduct produced. Each producer has its specific price of productsand services depending on expected marginal returns (Mankiwand Taylor, 2011).The market supply is derived from various producers supply curve thatillustrate the specific prices each producer is willing to offer perunit product and the cost of production. As such, the market supplyof commodities will differ depending on the producer individualsupply curve. However, the forces of market such as competitiondemand changes and other aspects influence the market supply curve(Mankiwand Taylor, 2011).

Themajor determinants of price elasticity of demand

Elasticityof demand is determined by changes in price relative to demand.Inelastic demand is change in price which results in only a smallpercentage of change in demand means people are slow in respondingto changes in the price of commodities. Inelastic demand results whenthere are not many substitutes, there is necessity, small percentageof income and that the product is bought infrequentlyMankiw and Taylor, 2011).

Bottledwater thereare close alternative drinks but not absolute substitutes of bottlewater. As such, the percentage change in demand is inelastic.

Toothpastethereare no substitute to toothpaste and therefore demand for toothpasteis inelastic.

Cresttoothpasteideally, there are several brand of toothpaste and many are almostsimilar. In this case, the stronger brand carries the market while aweaker brand has low demand. Crest toothpaste has a relatively weakbrand hence its demand is elastic.

Ketchupthereare not substitute of Ketchup hence its demand is inelastic.

Diamondbracelets nothingcan substitute the value of diamond bracelets and its demand ishigher. There is very little change in demand inelastic

Microsoftwindows demandfor operating system depends on Microsoft production. As such, thereis no substitute for Microsoft windows other than the firm newproduction i.e. window 10, hence inelastic demand.

Distinctionbetween the characteristics of private and public goods

Publicgoods refer to products that can be consumed without reducing theiravailability to others. Public goods are available to all, arenon-rivalries and do not exclude anyone. Public goods are mostlyproduced by governments (Mankiwand Taylor, 2011).Private goods are not readily available, are limited for use by the‘owner.’ Private goods are mostly produced in the market systemand include among others food, cell phones, airplane rides etc.

(a)Frenchfriesthese are food and produced through the market system to satisfyprivate needs. The utility of French fries is limited to the buyer.Consumption of French fries reduces their availability to all peoplehence they are private goods.

(b)Airportscreeningis a ‘public good’ and fosters the interests of the generalpublic. All people must be screened for the general security of allrather than ‘private interest.’

(c)Courtsystemsthe justice system is meant to benefit the general public and notprivate individuals. The court system does not serve privateinterests but ‘public interests’ through maintaining law andorder.

(d)Maildeliveryis a “private service” that is limited to particular individuals.Delivery of mails is a ‘service’ that demands fees for work donehence not available ‘free’ to all unless one pays up.

(e)Medicalcareis a private affair that involves services of treatment to anindividual. As such, the ‘ownership’ of the treatment received islimited to an individual ‘Private’ hence it is a ‘privategood.’

References

Mankiw,N.G. Taylor, M.P. (2011). Economics(2nd ed., revised Ed.).Andover: Cengage Learning