Understanding how market equilibrium is maintained is essential for business managers. As a manager, it is important to consider how economic principles, and specifically supply and demand, are as a part of everyday business decisions. In the following paragraphs there will be a description of the economic concepts of supply, demand, and market equilibrium and discuss their relationship to real world examples. Demand
According to McConnell, Brue and Flynn (2009) “demand is a schedule or a curve that shows the various amount of a product that consumers are willing and able to purchase at each of series of possible prices during a specific period of time” (McConnell, Brue, & Flynn, 2009, p. 46). The inverse relationship between price and quality demanded is the quantities of a product that will be purchased at various possible prices (McConnell, Brue, & Flynn, 2009). An important concept of demand is when price decreases, the quantity demand increases and when the price increases, the quantity demand decreases.
Determinants of demand are consumers’ tastes (preferences), the number of buyers in the market, consumers’ income, the prices of related goods, and consumer expectations. For example to show how the law of demand works we will use the sale of school supplies. A well-known superstore retails school supplies such as notebook paper for $2. 99 and pencils for $1. 29. At their back-to-school sale their prices for notebook paper drops for $1. 00 and for pencils $. 29. As the prices went down, more consumers’ purchased school supplies.
The superstore is a strong believer in the law of demand concept. Supply Supply is a schedule or curve that shows the various amounts of a product that producer are willing and able to make available for sale at each of a series of possible prices during a specific period” (McConnell, Brue, & Flynn, 2009). As prices rise, the quantity supplied rises along with it; as prices drop, the quantity supplied drops as well. The law of supply is the relationship between the quantity supplied rising and the quantity supplied dropping. A supply schedule shows us that all things being equal, companies will produce and offer for sale more of their product at a high price than at a low price.
The basic determinants of supply are resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and the number of sellers in the market. For an example of how determinants affect supply. Prices of other goods; companies that produce a particular product. Let’s use the world’s foremost shoe retailer Nike as an example. Nike produces tennis shoes, but sometimes uses their plant and equipment to produce alternative goods, like headbands and sweatpants. If the competitors’ price of these “other goods” is higher that may entice Nike to switch production to those other goods in order to increase profits.
Market Equilibrium Equilibrium price or marking clearing price is the price where the intentions of buyers and sellers match. According to McConnell, Brue, and Flynn it is the price where quantity demand equals quantity supplied (2009). Competition among buyers and sellers drives the price to the equilibrium price; once there, it remains unless it is subsequently disturbed by changes in demand or supply (p. 55). When quality supplied exceeds quantity demanded this is known as surplus. Surplus drive prices down. When quantity demanded exceeds quantity supplied it is a shortage.
The law of demand assumes that consumers will buy more of a product at a low price than a high price. Changes in determinants of demand shift the market demand curve. The law of supply states that, other things equal, and that producers will offer more of a product at a high price than at a low price. Equilibrium price is when market demand and market supply adjust the price to the point at which the quantities demanded and supplied are equal. Knowing the market equilibration process is important for manager when making sound business decisions, as it relates to demand and supply.
McConnell, C. R., Brue, S.L., & Flynn, S.M. (2009). Economics: Principles, problems, and policies (18th ed.). New York: McGraw Hill/Irwin.