demand and supply model essay

Supply and Demand Model: How A Good’s Price Is Determined Essay

Introduction, quantity demand and supply, deriving the price, healthcare demand-supply curve, works cited.

A market is best described as a group of willing sellers and able buyers of a certain product or service. Competitive markets are constituted by many sellers and buyers hence they have remarkably little influence on the prices of commodities. Therefore, supply and demand curve becomes a powerful model in such markets, and it explains how customers and sellers interact.

Demand is the “amount of product that customers are able and willing to buy” (Bernanke 26). Quantity demand is the specified amount of product at a given cost required by buyers. The Law of demand hence states that, when other factors are held constant (ceteris paribus), the fall in demand will cause an increase in price (Wonderling, Gruen, and Black 34).

Supply, on the other hand, is the amount of products that sellers are able and willing to take to the market and sell. Quantity supplied is the amount of product that suppliers bring for sale at a certain price (Wonderling, Gruen, and Black 34). Price is, hence, a major determinant of demand/supply. Other factors include “income, prices of substitutes or complements, expectations, taste, and preferences” (Wonderling, Gruen, and Black 36).

In the health sector, healthcare insurance has an exceptional role in attaining a balance. When the market is unregulated, it will result in private health insurance and the impact on moral hazard will not depend on the objective of taking the insurance. With insurance in place, there are often tradeoffs of objectives (Santerre, and Neun 214). The more people are insured, the less risk and the more the demand and, therefore, cost.

This scenario underscores why most economists will approve of supply side controls as minimal possible option for dealing with the problem. Voluntary health insurance results in two main issues viz. cream skimming and adverse selection.

Contrary to the moral hazard, these two issues are merely social problems when health insurance is covering distinct statuses only (Santerre, and Neun 214). Conventionally, this understanding holds that, when a market fails to supply normal services at a price that everyone can buy, it is not a market failure.

Price is determined when supply and demand interact. The resultant market price depends on both demand and supply in the market. There can be an exchange of goods and services whenever buyers and sellers agree on a certain price them (Taylor, and Weerapana 116). When the seller and the buyer agree on a price, this phenomenon is termed as the ‘equilibrium’. This point is also the market clearing price as shown in Figure 1:

Figure 1: equilibrium

The customers and suppliers are both able and willing to do the exchange at price P and quantity Q. At this point, the supply and demand are balanced. At any price below the P, the demand will be higher that the supply and vice versa. At lower prices than P, the buyers will be eager to obtain products or services that the suppliers are not able to supply.

Figure 2: shifts in demand and supply

The normal market price is not normally fair to all the players in the market. The prices do not guarantee satisfaction for buyers and sellers. The competitive positions in the market may determine satisfaction. The consumers will tend to maximize their satisfaction in the competitive limits (Taylor and Weerapana 116). Lower prices will benefit the consumers more, hence, induce competition. Higher prices attract more suppliers hence increase competition and equilibriums shift. Figure 2 illustrates this:

Healthcare supply and demand are distinctive. Care cannot be pulled off the stores and supplied to the users then paid via cash as other commodities. The desired outcome cannot be guaranteed in such a case (Santerre, and Neun 215). Many of the factors affecting supply and demand of healthcare are far much beyond the control of the healthcare providers.

Its analysis is thus, based on two fundamental perceptions of the effective use of the medical resources. First, economics should not be a resource allocation scheme and second, efficiency in the use of resources in healthcare can be comprehended by identification of the production function, which represents the supply of care (Folland, Goodman, and Stano 355).

In the event that the demand and supply changes, there will be a shift in the equilibrium price, as well. Considering that there is not an increase in supply, the movement will be along the demand curve to a new equilibrium price where excess supplies will be cleared off the market (Baumol and Blinder 67). The customer will only purchase more products at a lower price. Figure 3 illustrates this:

Figure 3: Shift in Price

A shift in demand because of the factors that influence consumption will also cause a change in the price. When supply is not affected, the net impact on the price will be movement along the supply curve to a lower equilibrium where a new balance is found between the supply and demand (Bernanke 84). For prices to increase, suppliers will be forced to reduce the quantity they supply to the market. The result is a shift in demand to a new price point which also a new equilibrium (Bernanke 84). The figure below represents these changes.

The changes in demand and supply can be exceedingly short lived or long lasting. There are numerous non price factors that affect the market price in a short period; for instance, taste and preferences on the part of the consumer or change in technology of the supplier (Bernanke 84).

Figure 4: Shift in demand

The behaviour of the market forces can be analyzed by looking at the demand supply curves. In health care, it is evident that a different form of a curve will be produced. In the private health care market, price and quantity obey the supply-demand model (Santerre, and Neun 215).

Figure 5: Healthcare demand –supply curve

However, because healthcare is an essential product, governments always intervene to ensure that everyone has access to care. Two crucial points should be noted; one, the price at the point of consumption is zero and two, the supply is normally fixed at any one point (Henderson 33). Even when practitioners are continuously being trained, the government that decides when there is a need and when to increase the number of care providers that are fully qualified (Henderson 33). Therefore in the short-run the demand-supply curve and equilibrium are particularly odd as in figure 5.

The supply curve is vertical since, unlike other consumer products, the government can only supply a fixed amount of health care in a certain short period (Folland, Goodman, and Stano 355). The demand curve remains normal, but since the price is zero, the excess demand is unusually extensive from A to B, and the outcome of this scenario is that, there will be queues and long-waiting list in the healthcare facilities. Besides, progress in technology continues to create new demands, hence the demand curve continues shifting to the right at a faster rate than the government can manipulate the supply curve to shift to the right (Folland, Goodman, and Stano 414).

Economists agree that the health sector is complex, and it is described by some unusual problems. The orthodox economists in general content that patients (demand) are protected from the price (cost) of care by the health insurance. This increases demand (a moral hazard). Removing demand strains causes complication in a competitive market.

Baumol, William, and Blinder, Alan. Macroeconomics: Principles and Policy . New York: Cengage Learning, 2008. Print

Bernanke, Ben. Principles of Microeconomics . Boston: McGraw-Hill, 2003. Print

Folland, Sherman, Goodman, Allen, and Stano, Miron. The Economics of Health and Health Care . New Jersey: Pearson Prentice Hall, 2007. Print

Henderson, James. Health Economics & Policy . New York: Cengage Learning, 2009.

Santerre, Rexford, and Neun, Stephen. Health Economics: Theories, Insights, and Industry Studies . New York: Cengage Learning, 2010. Print

Taylor, John, and Weerapana, Akila. Principles of Economics: Global Financial Crisis . New York: Cengage Learning, 2009. Print

Wonderling, David, Gruen, Reinhold, and Black, Nick. Introduction to Health Economics: Understanding Public Health . Berkshire: Open University Press, 2005. Print

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Supply and Demand Essay

In economics, the terms “Supply” and “Demand” are of fundamental importance to the discipline because they are the factors that drive all other related activities of the economy. Argumentatively, although the field is broad and these two are like the pillars that hold together everything else in place, the exchange of goods and services from the seller side and the buyer’s side. Simply put, the demand covers the customer side while the supply side covers the seller’s side, who provide the goods or service. So, this, paper will discuss in detail the two terms and extensively cover what they mean in the context of economic transactions and how they relate. Also, the paper will seek to explore the shifts in demand and supply; because they are not static but are subject to changes of either going up or going down- for both depending on various factors that will form part of the subsequent discussions of this paper.

At this point, it is important to note while they are closely related, it is not automatic that an increase will one will cause the same reaction for the other. Each independently responds differently to certain factors. However, in a state of equilibrium, the shifts are similar where if demand, increases the seller responds also by increasing their goods or services(Bas, et al. 4). For each, the discussions will revolve around meaning, application in the real-life, and the relationship with the causal agents that leads to particular changes. The figure below shows the relationship between demand and supply that will guide the subsequent discussions.

Figure 1 Relationship between Demand and Supply

Demand in the field of economics refers to the total amount of goods or services that consumers are able and willing to pay for it when it is at that price. In practice, demand is usually different at each price level which is the main factor that influences the patterns of consumers’ behavior. The price is used as the reference point of explanation because it usually reflects the value of a product and its utility preference to the buyer. In particular, just how much is a customer willing to pay and what amount of the product or service do they want for it at that price is what demand is all about(Bas, et al. 11). In some of the cases, a customer attending a fair on a hot day may be willing to pay more for a glass of lemonade than if they had attended the fair when the weather was cold. So, demand is the total amount of product that a consumer will be expecting in return for money of a certain value.

At different prices, the quantity will change because of the different factors mentioned in the subsequent parts of the paper. From this example, it is clear that the demands thus also exist at different levels; the first is the market demand for the product itself in the economy and the second is the aggregate collective demand of all the products that exist in the market for that economy. In the first level, the focus is the product itself in the context of the consumer, and for the second, it is all the products that are present in that specific jurisdiction. A good example is a demand for a GTI muscle automobile in the US may be 15 % while the demand for all cars in the US is 56%. Therefore, in the first example, the particular product is assessed individually within the context of the market while in the second level it is all products that the same, i.e. cars, that are calculated.

Supply, on the other hand as aforementioned represents the other side of the economic transaction divide, the suppliers. The suppliers’ framework is overly broad and is used to refer to all such factors that are elements of production including labor, money, and companies that collectively produce the goods to the buyer. Supply: therefore, this definition refers to the total amount of goods and services that the supplier is willing to produce and offer to the market at a certain price (Moheb-Alizadeh and Handfield 5). Using the earlier example, now the seller of the lemonade at the fair is willing to make a certain amount of the drink for the market at a particular price. So, for example, if the fair is hosted on a sunny day, the price is higher and thus he or she may be willing to produce more lemonade for the fairgoers. However, on a cold day when the price of the lemonade is lower, he may only be willing to produce a lower amount of lower to reduce. The price is used as the central incentive in an economy that is why in both cases it is the principal elements that are used to define both supply and demand. As stated earlier, the movements are not static but rather shift according to different factors.

The shifts in the demand and supply of the goods and services for a particular product is dependent primarily on the prices of the inputs that are used in the production of the goods and services such as labor, raw materials, tariffs attached to the product and technical resources involved in the production. Similarly, for the demand for a good or service shifts according to the prices set for the product or service (Mankiw 54). When the prices are higher and other factors remain constant regarding the product, the demand reduces and when the prices reduce, the demand increases. From this point of view, it is accurate to hypothesize that demand and supply shifts according to how the prices move when all other factors remain constant.

Works Cited

Bas, M., et al. “From micro to macro: Demand, supply, and heterogeneity in the trade elasticity.”  Journal of International Economics , vol. 108, 2017, pp. 1-19, doi:10.1016/j.jinteco.2017.05.001.

Mankiw, N. G.  Essentials of economics . Cengage Learning, 2020.

Moheb-Alizadeh, H., and R. Handfield. “Developing talent from a supply–demand perspective: An optimization model for managers.”  Logistics , vol. 1, no. 1, 2017, p. 5, doi:10.3390/logistics1010005.

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The law of supply and demand is a fundamental concept of economics and a theory popularized by  Adam Smith  in 1776. The principles of supply and demand are effective in predicting market behavior. Whether an individual is a manufacturer or a consumer, the supply and demand equilibrium is relevant in daily market transactions.

Key Takeaways

• The law of supply and demand was popularized by Adam Smith in 1776.
• Consumer demand for a good commonly decreases as its price rises.
• As prices of a good increase, producers manufacture more to realize more profits.

Consumer demand for a good commonly decreases as its price rises. The figure below depicts the relationship between the price of a good and its demand from the consumer's standpoint. The demand curve is portrayed from the view of the consumer, whereas supply graphs are drawn from the producer's perspective.

If televisions were priced at $5 each, then consumers would purchase them and probably buy more TVs than they need based on price. The demand will remain high. If the price is $50,000, this good would likely be considered a luxury good, and demand would be low.

Demand is the quantity of a good that consumers are willing and able to purchase at various prices at a given time.

This example assumes that product differentiation does not exist. There is only one type of product sold at a single price to every consumer. In this closed scenario, the item is not an essential human necessity such as food or shelter, does not have a substitute, and consumers expect prices to remain stable. 

The supply curve considers the relationship between the price and available supply of an item from the producer's perspective rather than the consumer's.

When prices of a product increase, producers are willing to manufacture more of the product to realize greater profits. Falling prices depress production as producers may not recover input costs. If the costs to produce a TV are $50, production would be unprofitable when the selling price of the TV falls below $50.

If television prices are $1,000, manufacturers will focus on producing television sets over ventures and provide incentives to build more TVs. The behavior to seek maximum profits forces the supply curve to be upward-sloping. 

An underlying assumption of the theory lies in the producer taking on the role of a price taker. Rather than dictating the prices of the product, this input is determined by the market, and suppliers only face the decision of how much to produce, given the market price. Optimal scenarios are not always the case, such as in monopolistic markets.

Consumers typically look for the lowest cost, and producers test their products at the highest price. When prices become unreasonable, consumers change their preferences and move away from the product.

A proper balance must be achieved where both parties engage in ongoing business transactions to benefit consumers and producers. In supply and demand theory, the optimal price that results in producers and consumers achieving the maximum combined utility occurs where the supply and demand lines intersect.

In What Types of Economies Are Laws of Supply and Demand Less Reliable?

If the economic environment is not a free market, supply and demand are not influential factors. In  socialist economic systems , the government typically sets commodity prices regardless of the supply or demand conditions.

Does the Law of Supply and Demand Determine Market Conditions?

Multiple factors affect markets on both a microeconomic and a macroeconomic level. Supply and demand guide market behavior but do not determine it. Supply and demand are important factors, and Adam Smith referred to them as the  invisible hand  that guides a free market.

Does the Law of Supply and Demand Apply Only to Consumer Goods?

The theory of supply and demand relates not only to physical products such as television sets but also to wages and labor. More advanced theories of microeconomics and macroeconomics often adjust the assumptions and appearance of the supply and demand curve to illustrate concepts like economic surplus, monetary policy, aggregate supply and demand , fiscal stimulation, elasticity, and shortfalls.

The market theory of supply and demand was popularized by Adam Smith in 1776. Consumer demand for a good decreases as its price rises. As prices rise, producers manufacture more to gain more profits. The optimal price that shows an equilibrium between supply and demand is where the supply and demand lines intersect on a graph.

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