Factors Causing Shift In Demand Economics Essay Explain the following terms Market Demand, Market supply, what causes a shift in the demand and supply Market Demand The ability and willingness of the consumers to buy a product is known as the demand for that product, however the market demand is the aggregate potential and willingness of the consumers to buy a specific product in the specific market for a specific time. Quantity Price Q1 Q2 Q3 $10 $5 $15 D Factors Causing Shift in Demand The potential factors that shift the demand curve and affect the demand of the product in the market are Price of the goods: The change in the price of the good will lead to shift in the demand curve accordingly, the increase in the price of the good will decrease the demand and decrease in the price will increase the demand of the good Price of the substitute goods The price of the substitutes or related goods will lead to the shift of demand of the other goods, e.g. the decrease in the price of Pepsi would lead to the decrease in the demand for Coca Cola but increase in demand of the Pepsi as they are the perfect substitutes of each other This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Income of the consumers The income of the consumer have the direct relation with the demand of the goods, the increase in the income of the consumer will ultimately lead to the increase in the demand of the goods, as the propensity to buy will raise, and the decrease in the income will lead to the decrease in the demand for the particular good. Advertising and consumer tastes: The advertising of the product would affect the demand for that product, for instance consumers bought 10,000 units of the apparel without advertising. But after the advertising the demand could increase to the 20,000 units. Thus the advertising has the potential effect on shifting of the demand. Market Supply: The supply is the production of a particular good at alternative prices of that good, alternative input prices and alternative values of the other variables affecting the supply. However market supply is the willingness and ability of the producer to supply the particular good in the particular market at particular time. $15 $10 $5 Q1 Q2 Q3 Quantity Price S Factors causing shift in supply There are several identified factors that cause the shift in the supply among them the following are: Price of the goods: When the price of the particular good will rise the producers will tend to supply more as it will increase their profit with the more number of the goods sold. Prices of input e.g. wages of labor, price of technology etc.: The input prices would have the direct effect on the supply of the particular goods such as the higher wages for the labor would ultimately lower the supply in the market and will cause the shift in the supply curve. And so does the price of the technology have the impact as well. Number of firms in the market As more number of the firms will enter the market the supply would increase thus putting pressure towards lowering the price, and ultimately the firms will try to reduce and limit the supply in the market in order to control the prices. Taxes and government intervention: The government can intervene in two ways; either enhancing the tax level or giving the subsidy, the increased tax on the factors of production will limit the supply. However the subsidy will have the opposite effect, the subsidy from the government would help the firms to produce more and thus increase the supply. Market equilibrium, Consumer surplus, Producer surplus Market Equilibrium: Market equilibrium is the situation when the demand of the product is equal to the supply of that product. And this market equilibrium in a competitive market is attained by the interaction of all the sellers and the buyers in market. The interaction of the supply and demand ultimately determines the competitive price such that there will be neither shortage nor any surplus in the market and thus at this point the price is the equilibrium price and quantity is the equilibrium quantity and the market is said to be in equilibrium. Equilibrium Q3 Q2 Q1 Quantity Price $5 $10 $15 D S D S Consumer Surplus: The consumer surplus is the value that consumer get from the product but they do not have to pay for it. Or we can say that consumer surplus is the measure of the consumer satisfaction, by calculating the difference between the willingness of the consumer to pay for a certain product despite of its relative market price. For instance the customer goes to market to buy a mobile at $150 but he found that there is sale on the prices and the mobile is of $100 so those $50 are the consumer surplus that he was willing to pay. Quantity Price Q0 P0 Consumer Surplus Producer Surplus: Price As the consumer wants the prices to be as low the producers want the prices to be as high, the supply curve tells the amount at which the producers will be willing to produce at a given price. For instance the producer wants to sell the 1000 units at $2 and the consumers are willing to buy that product in $3. The producer will sell the 1000 units at $3 and will receive $3000 in total. The producer was willing to accept the amount of $2000 but the surplus he gained is $3000-$2000 = $1000, this $1000 is the producer surplus. Quantity $2 $3 1000 Producer Surplus Price ceiling and price floor explain with the help of real life examples how these price controls are enforced by the government. Price Ceiling: The price ceilings tend to be the maximum legal prices a producer could charge for its good in the market. The price system is used to determine that everyone has the access to the good; if the prices will rise indefinitely then we will be living in the world of scarcity. The governments enforce these price ceilings so that the consumer would not charge more. The example is the price of the gasoline, which when rests on the determination of the market forces tend to rise and then government has to impose the price ceilings in order to control the rising prices of the gasoline. This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Price Floor: The price floor is opposite to the price ceilings, they are the minimum legal prices that could be charged in the market for a particular good. When the equilibrium prices are tend to be too low for the producers to produce they form a lobby against the low prices; the government and legislative are then forced to put the price floors in order set the minimum legal prices for the goods. For instance in Quebec and Ontario the price floors are established on the alcohol to artificially keep the higher prices and lower the consumption of the alcohol and protect the Canadian brewers. What information is embodied in a budget line? What shifts occur in the budget line when money income increases and decreases? Budget line: YThe bundles of the goods that a consumer can afford are the budget set, and the combinations of the goods that could actually exhaust the consumers income is defined by the budget line. 5 Budget Line X 3 4 10 2 4 0 Effect of Increase and Decrease in Income If the prices of the goods remain constant, this would not affect the slope of the budget line, and the increase in the income would lead to the parallel shift of budget towards right indicating that propensity of the consumer to buy has been increased. However reduction in the income would lead the budget line to shift toward the left, thus demonstrating the decrease in the propensity of the consumer to spend more Effect of Increase and Decrease in Income Graphical representation X Y M2/Px M0/Px M1/Px M2/Py M0/Py M1/Py Increase in Income Decrease in Income What shifts occur in the budget line when the price of the product shown on the vertical axis (ii) increases (ii) decreases? If the income of the consumer remained fixing, and there is change in the prices of the products there will be shift in the slope of the budget line. If price decrease: If the price of the good X decreases and the price of the good Y remains same, the budget line slope will become more flat as the demand of the Y good remains constant but the demand of X will increase. M/Py M/P0x M/P1x Y X New Budget Line Previous Budget Line If the price increases: Keeping the above situation for the Y product same, if the price of the good X increases the budget line will have the clockwise shift in its slope, the demand and ability to buy the good X will decrease simultaneously X Y 0 M/Px1 M/Px0 M/Py Previous Budget Line New Budget Line What information is contained in an indifference curve? Why are such curves (i) down sloping and convex to the origin? Why does total utility increase as the consumer moves to indifference curves farther from the origin? The curve that defines the combinations of two goods, that provides the consumer with the same level of the satisfaction is indifference curve. The consumers have to choose among the different bundles of the goods, this indifference curves work on the basis of the diminishing marginal rate of the substitution in which for instance, the consumer in order to have one more unit of good Y has to leave two units of the good X this is the reason that the indifference curves are convex towards the origin. The indifference curves that are farther from the origin are have increased total utility and are preferred more as they represent larger bundles of the goods. A C B Y X Explain why the point of tangency of the budget line with an indifference curve is the consumer’s equilibrium position. Explain why any point where the budget line intersects an indifference curve is not equilibrium and the equilibrium is actually where MUx / MUy = Px/Py The objective of the consumer is to maximize the level of the satisfaction within the budget, if the bundle A, B and C are lying on the budget line of the consumer he will choose the bundle C where the budget line is in tangent with the indifference curve as this will maximize the satisfaction level within the budget constraint but the other bundles the A and B will exhaust the income of the consumer completely. This is the reason that the consumer equilibrium is established where MUx / MUy = Px/Py where the relative prices of the two goods are equal to the marginal utility of both the products. This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Y X B C A Consumer Equilibrium ISO-COST and ISO-QUANT ISO-COST: ISOCOST is the line that demonstrate the combinations of the input that costs the producer same amount of money in production of the good. For instance the producer has the option of labor and capital to use as the input in the production within the budget of $120 and has three combinations X, Y, and Z Combinations Units of Capital $15 per unit Units of Labor $ 10 per unit Total expenditure In $ X 8 0 120 Y 6 3 120 Z 0 12 120 6 0 3 12 8 Capital Labor Isocost Line ISO-QUANT: ISOQUANT is the curve that demonstrate the all possible combination of the inputs that yield the same level of the output, for instance the producer has two input options with the three combinations Combination Labor Capital Yield X 3 20 60 Y 4 15 60 Z 20 3 60 Labor Capital 20 3 4 3 15 20 Isoquant Curve X Y Z Producers Equilibrium Producer’s equilibrium is the situation in which the level of the output of the commodity gives the maximum profit to the producer. Thus the situation where the TR-TC = Profit is greater or Marginal revenue = Marginal Cost is the producer’s equilibrium. When MC is equal to the MR the gain becomes equal to the cost thus the producer is said to be in equilibrium. Perfect competition, monopoly, monopolistic competition, oligopoly, Perfect price discrimination, quantity discrimination and multi market differentiation. Explain all this with the help of an example. Perfect Competition The market condition in which there are large number of firms, having access to the similar technologies and produce the similar products and no firm has any potential competitive advantage over the other. The most common example related to the perfect competition is the agricultural products such as the vegetables and fruits. Monopoly: It is the market structure in which the single firm serves the entire market for a certain good that has no other close substitutes and has the monopoly power as the barrier to entry of the other firms. The utility companies are the perfect example of the monopoly like the electricity, water, natural gas suppliers in the market. Monopolistic competition The monopolistically competitive market lies in between the monopoly and perfect competition, it is the market structure in which there are many buyers and sellers with each firm producing the different product, and there is free entry and exit in the industry. In the monopolistic competition the products slightly differs from each other and are not the perfect substitutes to each other. The common example for this market structure is the fast food companies such as burger king, McDonald etc. Oligopoly Oligopoly is the market structure in which there are relatively only few large firms in the industry, ranges from 2 to 10 firms, the oligopoly having only two firms is called duopoly. The common example for oligopoly market structure is the telecommunication industry, mobile industry such as Nokia, Sony, Samsung, HTC etc. Perfect price discrimination The perfect price discrimination, or the first degree price discrimination is the one in which the producer charge each consumer the maximum price that he/she is willing to pay for each unit of the good purchased. The producers through the perfect price discrimination extract the entire surplus from consumer and get the higher profits. The most common example related to this is the bidding process in which the consumer is willing to pay the highest price to get the product and the producer or the supplier keep increasing the prices. Quantity discrimination The quantity discrimination is related to the second degree price discrimination in which the producers set the different prices for different quantities such as, the consumption of electricity; there are higher rates on consuming the electricity in first hour then subsequent after the one hour. Multi market differentiation This is the third degree of the price discrimination, in this the producer tend to charge the different prices for the same product in the different market segments. Such as the student’s discount on the tickets to the museum or the senior citizen discount on the hotel rooms etc. Case Studies Questions There were almost 6000 institutions in the market that issued the credit cards, thus the large number of the firms in the market is the characteristic of the perfect competition They all were producing the same purpose product that is “credit cards” or” visa and master cards” thus the same products by all the firms is the other characteristic of the perfect competition There are no barriers to the entry or to the exit in the market by any institution There was no price discrimination as there was no competitive advantage of any institution on the other and all the institutions were providing the same product. In credit card market the same condition prevails in every country and in Indian scenario as well because the purpose of the product is same and there is large number of institutions providing the same product. Solution: International Harvester and American Tobacco International harvester had the monopoly over the market, producing the cheap equipment to the agrarian nation, they put the barrier to the entry of the other companies and thus the other companies have to be price takers in this situation. The American Tobacco was seem to have the negative monopoly they were charging the high prices to the consumers, exploiting the consumers and causing the damage to the health of the consumers. Standard Oil There was no risk of the over production, and the firm has the control over the market which thus helped in lowering the prices for the services to the consumer, with the efficient use of the resources and benefits to the others. However there would be the limitation and risk of exploitation of the labor. AT&T and Microsoft In the case of AT&T the consumers were getting the better services as there was no competitive firms in the market and there was the perfect and efficient use of the resources despite the fixed prices, but breaking up the monopoly lowered the level of the quality of service to the consumers with the increase in the competition in the market. However the Microsoft case is related to the brand loyalty, the Microsoft had been a monopoly in the market for the long run, but consumers are loyal to the brand. Benefits: There was no risk of over production, and there was efficient use of the resources The customers were loyal to the brand The quality of the services and product was good since there was monopoly of the company There was the control over the market Consumers could get the lower prices on the services and products Other firms have to be price takers in order to enter in to the market Limitations: There was extreme exploitation of the consumers The consumers have restricted choice There was threat of rebel from the other parties and legislative wraths There was increased possibility of the exploitation of the labor