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Interaction of demand and supply with elasticity

Identify and explain the main economic factors that determine the price of a good or service. Please include how demand and supply interact and elasticity, etc. Also give examples with graphs.

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To start with, price can be defined as the amount of money which needs to be paid in order to get hold of a particular good.  It can also be described as the total or sum of money at which a good is valued. In other words, price is the value that a vendor fixes on his or her products in marketplace. It is the value at which a product is purchased or sold. Moving ahead, price plays an economic task of chief importance. As long as the price is not unnaturally managed, it offers an economic means by way of which products and facilities are allocated amongst several individuals wanting them. Also, it performs as a gauge of the potency of demand for distinct goods and makes possible for the manufacturers to take action accordingly. This particular method is called the price mechanism and is grounded on the theory that only by enabling prices to shift generously would the supply of any particular good matches up demand (Stiglitz & Walsh, 2006).

Moving ahead, sellers spend good amount of time in analyzing competitors as well as customers’ demand at the time when deciding the suitable price for a good or service. Despite the fact that several economic factors that influence price could be estimated, a number of these economic aspects are an upshot of the entire economy or the economic arrangement of the marketplace in which the company functions. The factors that influence and determine the price are demand and supply, elasticity, recession, market structure etc. The continuing sections bring to light a detailed description of all the factors that determine the price of goods and services.

Supply and demand:

Initially, the demand and supply are considered to be an economic paradigm of price determination within a market. The above statement implies that within a competitive marketplace, the unit cost for a specific product would change till it reaches a position where the quantity demanded by the customer at the prevailing price would be equivalent to the quantity supplied by manufacturer at prevailing price, leading to an economic equilibrium of quantity and price (Gordon, 1990) . Moving ahead, supply implies the changing quantities of a product that manufacturer would offer at distinct prices; in common, a greater price gives way to a higher supply. Moreover, demand represents the amount of a product which is demanded by customer at any particular price. Additionally, according to the law of demand there exists an inverse relationship between price and demand, or the quantity of a good customer is ready to buy. Purchasers normally wish to purchase more of a good at the time when the price is less and purchase less when the price is high. However, in a perfectly competitive economy, the amalgamation the downward-sloping demand curve and the upward-sloping supply curve produces a supply and demand schedule which at the junction of the two curves i.e. demand as well as supply, uncovers the equilibrium price of a product.

Further, the four fundamental laws of demand and supply are explained below:

• Firstly, in case if demand increments and supply continues to be same, then it results in greater equilibrium price and quantity.

• Secondly, in case if supply increments and demand continues to be same, then it results in lesser equilibrium price and greater quantity.

• Thirdly, in case if demand goes down and supply continues to be same, then it results in lesser equilibrium price as well as quantity.

• Lastly, in case if supply goes down and demand continues to be same, then it results in greater price and lesser quantity.

1777_demand and supply.jpg

The above diagram clearly brings to light the fact how the price P of a commodity is decided through equilibrium between fabrication at a particular price i.e. supply S and the willingness of people to purchase at a particular price i.e. demand D. Further, it highlights a positive movement in demand curve from D1 to D2, leading to an increment in price (P) and total quantity sold (Q) of a particular commodity.

Elasticity:

The elasticity of demand brings to light how receptive customers are to the cost of particular goods. Goods having high elasticity are ones wherein a small increment in price would result in customers wanting less, or less revenue being created for the good. An item might be extremely elastic in case if there exist a number of alternates for it. For instance, if it is a luxury product or if it is a good or facility which uses up a huge fraction of the customers’ total income. On the other hand highly inelastic products are the goods which are perceived as necessities. Moreover, a variation in cost is expected to have very less or no, alteration in the quantity demanded. For instance, there would be a little change in the quantity demanded of petrol which is needed to fuel the vehicles even if price changes. The concept of elasticity is considered to be highly important as it highlights the way particular goods would put up with a considerable increase in cost in case if there prevails no evenhanded substitute (Pindyck and Daniel, 1992) .

Market Structure
:

The kind of marketplace where the goods or facilities are put up for sale influences the pricing decisions. For instance, in a perfect competition there exist a large number of purchasers as well as vendors of a homogeneous good, as a result the companies operating in such marketplaces are expressed as price takers and not the price makers, which imply they cannot independently influence power over the cost. Moreover, if they wish to sell the good, they need to stick to the marketplace price. However, on the other hand i.e. in case of an oligopolistic marketplace, where there exist a few number of companies controlling single marketplace. Due to the reason that one company is an alternate for other in this kind of marketplace, customers are highly responsive to price and would rapidly move on to some other company for the best price.

Recession
:

At the time of a downturn prices of the products tend to be lesser due to the fact that the customers spend a smaller amount and demand for lower prices. When products have been languishing in the outlet for so long time, it turns out to be a responsibility to the company; the shop brings down costs with the intention to get away from older stock. This is mainly right in the beginning of a downturn at the time when producers and sellers are directing their sales on a supposition that they would be functioning in a steady marketplace. As facts of the recession mounts, prices needs to be brought down so as to sell the products and trim down the loss.

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