Supply and demand
Demand and Supply
RE-CAP & REMIND
The market demand curve is defined as the total of individual demand that are found in a given market. On the hand, the individual demand curve is defined as the quantity of goods and services that a consumer is ready to buy at a given price. When all the demand of individual consumers is put together, then we can form market demand.
The market supply is defined as the total of individual sellers who are willing to sell in a given market. On the other hand, individual supply is the quantity of goods that sellers are willing to sell in the market at a given price. When we add the total individual supply in the market, then we are in the position of getting a market supply of a given commodity.
Consumer surplus according to economics is the difference that exists between the amount that the consumers are able and willing to pay for the goods and services that are there in the market and the actual amount of money that the consumer pays consumer pays in the market.
Producer surplus according to economists is the difference that a producer receives for a given good that he deals with and the minimum amount that a producer is willing to receive for that product regarding economic value.
Total surplus is the sum of consumer surplus and producer surplus. Hence the addition of the above-defined terms is equal to total surplus.
Deadweight loss according to economists is the act of losing efficiency which comes as a result of not attaining equilibrium of goods or services in the market.
Allocative efficiency is purely concerned with the way goods and services a being distributed and allocated in the society. The allocation is done in a way that the consumer’s preferences are observed closely leading to the satisfaction of consumers with the scarce resources that are available. Regardless of the way that allocation efficiency is defined, the major concept is the distribution is the satisfaction of consumer needs from the scarce available resources.
Very flat demand curve
The above scenario happens when a firm competes in a market that has a perfect type of competition. Here the competition is based on the services, but the prices are constant. When one tries to hike the prices, then it will be difficult for him/ her to get customers. When we increase the supply of cars in the market, it means that the demand will remain constant while the supply is increasing. This means that the demand curve will start tilting to the left. The tilting happens because consumers will have a wide category from which they will select their cars from. The law of demand and supply will apply at the long run as the players in the sector will start to adjust their prices so that they can perfectly compete to fetch high profits in the market.
A very steep demand curve
The above diagram shows a diagram of a very steep demand curve that is caused due to the monopoly of a given firm in the production of a given product. This will lead the firm to control the market and also the demand that is going to exist in the market. Also, it can be in those products that are inelastic (those products that are not sensitive to the change of prices in the market). When the supply will increase, then it means that the demand curve will tilt to the left so as to reach the equilibrium that is sensitive. The above diagrams explain the scenario of change in supply and how the demand curve will change.
B) Price elasticity is the change in demand that is caused by the change of price of a given commodity in the market. When the price of a given commodity rises then it means that its demand is going to reduce since the consumers’ ability to buy this product will be reduced. This will make them look for alternative products that will substitute it hence leading to reduced demand for the product. However, if the product’s demand is inelastic, then it may not change the demand for the product. On the other hand, when the price of the commodity or service is reduced is reduced then it is possible that the demand will increase further due to the fact that the consumers’ ability to purchase this commodity is increased leading to the increase in demand. However, the case does not apply to the inelastic product. Change of demand is commonly seen on the product and services that are elastic hence this can lead towards the shift of the demand curve either way.
C) According to the above the above diagrams, the market does not seem to be allocative efficient. Where there is a steep demand curve, it means that the resources are not enough for the consumers. This means that allocative efficiency looks on the way the distribution of resources are done for the products to ensure that all at least are satisfied with the way the distribution of such resources Is done. If the steepness of the demand curve is relaxed somehow then it will mean that a reasonable equilibrium is achieved something that will be seen that the allocation efficiency is observed in the right way. On the other hand on the flat demand curve, it means that the market is perfect competition. This makes to be in allocation efficiency as the consumers are satisfied, and the consumers maintain their demand.
APPLICATION & AWARENESS
A price ceiling is an act where the highest price of fairs is fixed either by the government or the controlling authority. If the government puts the ceiling price on the fare price then it means the taxis will have to observe this rule. This will make the demand for this service to rise as many of the citizens will be enabled to have the capacity of acquiring this service. On the other hand price, capping may make the service providers to withdraw their services as they will feel not satisfied with what they get in return. All these scenarios will lead to the rise in demand since the services will be cheaper and also on the other hand when owners withdraw their services then it means the demand will rise.
From the above diagram, it can be indicated that there is a rise in demand that is caused by the factors that have been discussed above. This is not health for consumers as they will have limited services due to the withdrawal by the owners. When owners withdraw then, it means that the consumers will crowd for the little service that will be left leading to demand rise. Whereas in the free market consumers will get services according to the prevailing market conditions. The consumers will be at a position that has a wide selection of services without being limited. This is so because the service providers will be happy with the way they are learning business. They will be satisfied with the charges, and also they will regulate themselves to compete favorably without any problem. The demand will not rise to high levels that may cause misery to the side of consumers. It will be regulated by the market forces hence achieving the allocation efficiency.
The potential loss surplus that will occur on the above is that the consumers will be paying a little higher for the services. Hence they will be paying much and their will to pay less will be felt. Most of the consumers will be left out hence looking for alternative services in other areas that are can serve the same purpose. But in the free market, the loss surplus will be reduced as they will be at a position that provides them with a variety hence being able to utilize what they have.
If the ceiling price is set at $3.50, then it means that many consumers will not be able to afford this services hence leading to reduced demand. On the other hand, the service providers will crowd the market since the price is attractive. This means that the supply will increase leading to consumer having a wide range from which they will choose from. When this happens, then it means that the demand and the equilibrium in the market are going to shift something that will lead to better allocation efficiency.
Forming a non-binding ceiling price at $3.50 means that the price charges will be higher something that will make most of the consumers not to afford this service. On the other had, those who are the service providers may opt to stick to the price that has been set by the government with the aim of maximizing the revenue. The role of the government is to protect consumers or players in a given sector. Allowing the consumers to be charged such higher prices means that the government shall have failed in playing its role.
LEARNING LIFE LESSONS
Surge pricing is a situation whereby fare prices are automatically increased when the demand in the market rises.
When the surge price rises then, it means that the demand for the product due to consumers being unable to consume to afford the service. The demand curve shifts from diagram two to one.
Surge in prices will of more harm to consumers and also may have an impact on the service providers
Aamir Attaa. Uber quietly introduces surge prices in Pakistan, 2016.
Arrigo Opocher and Ian Steedman, «Input Price-Input Quantity Relations and the Numeraire», Cambridge Journal of Economics, V. 3 (2009): 937–948
Goodwin, N, Nelson, J; Ackerman, F & Weisskopf, T: Microeconomics in Context 2d ed. Sharpe 2009