The fundamental aspects of microeconomic are demand and supply evaluation. Demand and supply evaluation is a look into how buyers and sellers interact to establish the transaction prices and quantities. The analysis of supply and demand is vital since it is applied to help solve a wide variety of problems. For instance, supply and demand analysis helps in understanding and predicting how changing world economic conditions impact market price and production. Also, supply and demand analysis helps in assessing the impact of government price controls, price supports, minimum wages, and production incentives, and it helps determine how taxes, tariffs, subsidies, and import quotas impact consumers and producers. Further, supply and demand characteristics differ from one market to another, and the supply and demand curves of a particular region are used to determine the market mechanism. The supply and demand curves are used to understand various phenomena such as how plans about future government policies or predictions about future economic conditions affect markets even before the policies and conditions become a reality.
Literature review
Factors affecting supply and demand
Numerous factors affect the demand and supply of products and services in the market. The factors that impact demand are known as the determinants of demand, and one of them is the income earned by a person. Generally, income can be referred to as the average of all a household’s profits, rents, wages interest payments, and other forms of earning in a given period. When the income of a consumer increases, their purchasing power increases. Some are even able to afford more luxurious products because of an increase in their income. Those products that demand changes directly with income are referred to as normal products. The demand for normal products increases with an increase in income, meaning that the demand curve shifts to the right. However, there are some goods which have the opposite effect, and they are known as inferior goods. Examples of inferior goods are second-hand goods and Turnips. For these inferior goods, as demand surges, the demand curve shifts to the left, and it means that as the income of people increases, the demand will reduce. Another determinant of demand is the price of related goods. There are two kinds of product categories that can impact the demand for goods, and they are substitute goods and complementary products. Substitute products are those that can be consumed in place of one another. Thus, when the price of one substitute decreases, the demand for that substitute will go up. An example is that the iPhone and Samsung phones are substitute products. If the price of the iPhone reduces, the demand for the iPhone will go up. It is because customers tend to get products of high quality but those that have lower prices. If the competitors of the substitute products decide to reduce their prices, the demand for the product will decrease because some of the consumers will go back to purchasing the other substitute products. Complementary goods are those that must be used together, such as smartphones and applications. Therefore, a decrease in the price of one product leads to an increase in demand for another. An example is if the prices of smartphones reduce, there will be an increase in demand for applications, and if the price of an application reduces, there will be a surge in demand for phones.
The next determinant is expectations about future price changes. If individuals expect prices to increase in the future, they will try to buy the products early to avoid higher prices in the future. Therefore, the demand for these products will increase presently. The expectations that individuals have about forthcoming changes in prices and even their won income will have n impact on their current purchases. Also, if the consumers expect that the prices will fall, the current demand for the products reduces. It is because these consumers would like to delay their purchases until after the prices of goods have reduced. There is also the determinant of population and the size and composition of the population impact demand. For instance, a growing population is good for businesses since it indicates that there will be an increase in demand. Likewise, if the population is aging and stable, demands for certain products like technological products reduce since these products best suit the young generation. Thus, the population composition is important since each age group has certain products that it dislikes and likes. Consumer preference is also a determinant of demand. Persons have different preferences and tastes based on their personalities. For example, some phone users prefer Apple products because they are considered to be products for high-class in society. Other persons love android products since their spare parts are easily available. Consumer prefers to determine the purchasing behavior of a consumer, and they are primarily impacted by trends and advertising. The last determinant of demand is the number of buyers . an increase in the number of buyers means that there will be an increase in demand and, ultimately, sales. Also, for the suppliers, when they see that the buyers of a certain product have increased, they make sure that these consumers can easily access the products. The convenience created increases demand.
Furthermore, there are numerous factors that impact supply, and they are known as the determinants of supply. The first determinant of supply is the number of producers. Without a doubt, a surge in the number of suppliers increases supply. It is because if the suppliers are many in the market, consumers can easily access the products in the market. Therefore, the producers will have to enhance their production to meet the needs of the suppliers. Also, an increase in sales and supply means that the supply curve shifts to the right and that the needs of the consumers are fulfilled. The second determinant of supply is the cost of production. An increase in the prices of raw materials means that there will be an increase in the cost of production. A decrease in the prices of raw materials reduces the cost of production. Other factors that impact the cost of production are government interventions like taxation and subsidies. Subsidies lower the cost of production, but an increase in taxes, especially on raw materials, increases the cost of production. An increase in the cost of production reduces supply since the suppliers find it expensive to make sure the products reach the consumer.
Moreover, technology is a determinant of supply. The level of technology impacts the supply chain and the production process. For instance, technology enhances efficiency in the supply chain, and this helps to increase the supply of goods. Also, when technology is used in the supply chain, it reduces the supply chain costs, and when used in the production process, it reduces the time used in production—similarly, the producers’ expectations impact supply. If the producers expect that the prices of a product will change in the near future, the present supply of the products will be impacted. An example is if the price is expected to decrease, producers will make sure that they supply a lot of products so that the present supply can be increased. However, if it is expected that the prices will increase in the future, producers will hold back on some of its products so that they can be made available once the products have increased. Furthermore, there is a supply determinant of the price of related goods produced. Substitutes are usually manufactured using similar products. Therefore, if the price of a substitute product reduces, the supply of other substitute goods will increase. For instance, there are many brands of smartphones, such as Samsung and Huawei. If the price of Samsung decreases, the supply of Huawei will increase. For the complement goods which must be used together, if the price of one complementary good increases, the supply of the other good will increase. The last determinant in supply is the changes in nature. There are some natural occurrences such as floods and earthquakes that impact the supply of products. For example, an earthquake can occur destroying roads hence impacting supply since the suppliers used the roads to transport products from the producers to retailers or consumers.
Elasticity of demand
The elasticity of demand can be defined as a change in the price of a good that impacts its demand. it is also known as the degree of responsiveness and it is gotten through comparing the degree of price changes with the quantities demanded or one of the variables on which demand depends. Some of the variables on which demand depend are the income of the consumer, price of the commodity and prices of related commodities. Furthermore, there exist various types of elasticity of demand and one of them is the price elasticity of demand. It can be defined as the response to the quantity demanded to alterations in the price of a commodity. The assumption in this case is that the consumers tastes and preferences, income and the prices of substitute goods re constant. To determine the price elasticity of demand, the percentage change in the quantity demanded is divided by the percentage change in price. The next type is the income elasticity of demand which is the degree of reaction of the amount demanded to an alteration in the income of a customer. The last type is the cross elasticity of demand of a commodity for another commodity. It is the change in demand of a certain commodity due to the change in price for another commodity.
How COVID-19 has affected supply and demand of things worldwide
The disruption and strain of the global supply chain is one of the most visible impacts of the corona virus pandemic since consumers are noticing that it is harder to find some goods at their local store. Experts in the field of operations and supply chain management believe that these are unprecedented disruptions in both supply and demand. Because of the dramatic shifts in supply and demand, the world is experiencing shortages. For instance, there is a shortage in hard sanitizers and toilet paper because the demand has increased and the supply has reduced. The demand has increased because sanitizers and toilet paper are seen as one of the basic items needed during this period. On the other hand, supply has reduced because of manufacturing constraints and disruption of distribution networks since most of the nations have closed down their transportation networks to in an effort to reduce the spread of coronavirus. Furthermore, because of shortages, many retailers have resorted to rationing some of the items. An example is that a majority of the retailers are limiting the toilet paper that can be bought by a single household. Moreover, there has been prioritization when it comes to supply and demand. for instance, online retailers like Amazon prioritize the supplies and deliveries of particular items like household and medical. Addittionally, there has been decrease in the number of stock keeping units that a majority of the retailers offer. It means that in an effort to make the supply chain more manageable, the retailers have decreased the variety of products that they offer. The move allows them to focus on making sure the customers get the basics and that there is more storage space for items that are presently in high demand. For these retailers, managing supply chains during this coronavirus crisis is a business unusual that requires some sacrifice.
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Conclusion
In conclusion, the success of companies and markets depend greatly on understanding supply and demand. supply and demand analysis is a basic tool of microeconomics and in competitive markets, supply and demand show us the quantity of goods that would be produced by firms and the quantity of goods that will be demanded by consumers as a function of price. Furthermore, there are elasticities that define the responsiveness of supply and demand to changes in income, prices and other variables. For example, the price elasticity of demand measures the degree of change in the amount demand resulting from a one percent increase in price. The elasticities have a time frame and that is why it is significant to differentiate between short-term and long-term elasticities. Finally, coronavirus has greatly impacted the global supply chain hence causing disruptions in supply and demand. The dramatic impacts on supply and demand are because the global supply chains have not been designed to withstand supply uncertainty and demand fluctuations. Going forward, the world will have to develop supply chains that can function well even during uncertain times such as the times of pandemics.