Microeconomics and the Laws of Supply and Demand
Microeconomics allows comprehending the basic laws and underlying assumptions that are observed at the micro-level, i.e. when individual economic agents interact with each other at the local markets. This paper summarizes and analyses the video Changes in Market Equilibrium (Khan Academy, 2012). In general, these economic laws are universal and can be applied to different situations including real-world products.
It is reasonable to identify two micro- and macroeconomic principles from the video. The first principle includes the equilibrium price and quantity because they relate to the actions of specific economic agents at the micro-level. The second one include supply and demand (in macroeconomics, the concepts of the aggregate demand and supply are often used) as they also determine the dynamics of economic processes at the macro-level. I have categorized these principles because they have a crucial role in understanding of market operations. Market price is important as it serves as an indicator of consumer preferences and potential profits that may be obtained by producers. The equilibrium quantity is important as it shows the point where the quantity demanded equals the quantity supplied (Colander, 2012). Market demand is a crucial concept as it demonstrates the consumers’ willingness to purchase products at different prices. Correspondingly, market supply allows understanding producers’ willingness to produce goods at different prices (Soderbery, 2015). It is necessary to understand interactions between market supply and demand as they demonstrate the general trend of market development.
The author demonstrates four major scenarios of changes in the supply and demand for products (the market for apples is used as an example). The first analyzed situation is the changes caused by the invention of a new disease resistant apple. This factor leads to the growing market supply. As suppliers receive additional opportunities for growing apples, they will increase their production. As the supply curve shifts to the right and the demand curve remains at the previous level, the equilibrium price will decline, and the equilibrium quantity will increase.
The second scenario examined in the video is the impact of the study about apples’ contribution to preventing cancer on the market equilibrium. This study affects directly the demand for apples. As the majority of consumers want to prevent cancer, they will shift their preferences to consuming more apples. As a result, the market demand for apples will rise. It will increase both the equilibrium price and quantity. The third scenario analyzed in the video is launching an advertising campaign by the pear cider industry. As many people may consider apple and pear ciders as substitutes, a new advertising campaign may affect their preferences and tastes. Consumers will tend to consume more pear cider. Thus, the demand for pear cider will increase, and the demand for apples will decline.
However, introducing a new advertising campaign may also affect the market supply. Apple suppliers may evaluate various alternatives for obtaining the maximum revenues from their products. Under the influence of the new campaign, they may expect that consumers will reorient to pears instead of apples. Therefore, some producers may also prefer the pears market over the apples one. It will diminish market supply, and the supply curve will shift to the left. Thus, both the demand and supply curves will shift to the left. It will have a strong impact on the equilibrium quantity, which will decline substantially. However, the ultimate impact on the equilibrium price can be different. There are three possible options. The first one is that the equilibrium price may not change. It will occur if the declines of market supply and demand are proportional. The second one is that the equilibrium price may increase; it will happen if supply declines more rapidly than demand. The third option is that the equilibrium price may diminish; it will occur if demand declines more rapidly than supply. The fourth analyzed scenario is the situation when apple pickers will unionize. They can demand wage increase and have a higher power to influence market processes (Sting & Huchzermeier, 2014). As a result, the supply curve will shift to the left; it will lead to the growing market prices and lower supply.
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The knowledge of these basic economic principles is applicable to different real-world situations. In my workplace, I may adjust the prices for products timely as well as predict the potential market dynamics. In this way, the company’s operations may become more flexible, which will both maximize its revenues and consumer satisfaction. I may also apply this understanding to many real-world products such as smartphones. I realize that the prices for these gadgets depend not only on their technological characteristics (as many people assume) but also on the combination of market supply and demand. Therefore, if I want to economize my funds, I may wait for several months as the demand for smartphones demonstrates the rapid dynamics. When the demand for a given gadget declines, its price will also decline. In this way, I can determine the optimal period for making my purchases.
The concepts of microeconomics help me to understand the factors that affect shifts in supply and demand on the market price and quantity. I realize general economic thinking and interests of both consumers and producers. The former want to maximize their utility and experience the influence of various advertising campaigns, scientific studies, etc. The latter want to maximize their profits and have to be very responsive to market signals. Understanding of the general motivation and incentives of all parties involved allows comprehending market dynamics. The concepts of macroeconomics are also helpful as the impact of demand and supply on the one hand and the aggregate demand and supply on the other hand are very similar. It shows that the basic economic laws are the same both at the micro- and macro-levels.
One of the most important aspects demonstrated in the video is the price elasticity to demand. It refers to responsiveness of market demand to changes in market price. If the price elasticity is high, then even small changes in prices lead to a considerable decline in the quantity demanded and vice versa. For example, in the third scenario (when the advertising campaign is introduced), the impact on the new equilibrium market price depends on the existing elasticity of demand and supply. If the former is higher, then the new market price will increase and vice versa. Therefore, markets with high elasticity of demand are more flexible and dynamic in comparison with those with low elasticity.
Moreover, firms also have to adjust their pricing strategies to the observed price elasticity of demand. If elasticity is high, firms are less interested in increasing market prices as it will lead to a substantial reduction in the quantity demanded (Tate, Mollenkopf, Stank, & Da Silva, 2015). If elasticity is low, then firms are more interested in increasing market prices as it does not affect the quantity demanded substantially. Therefore, firms tend to orient not only to their costs of production and available market alternatives but also to the elasticity of consumer demand. In this way, they can be able to predict the dynamics of equilibrium prices and quantities.
It may be concluded that the concepts of market price, quantity, supply and demand are crucial for understanding the existing market dynamics. Both consumers and producers depend on these market elements. Consumers are interested in purchasing products at the lowest possible price while producers want to maximize their revenues through higher prices. The equilibrium quantity reflects equality between the quantities demanded and supplied at the equilibrium price. Market supply and demand demonstrate the willingness of consumers and producers to buy or sell products at different prices. The analysis of four major scenarios helps to understand the impact of changes in market supply and demand on the equilibrium price and quantity. I may use it in my workplace and in planning my purchases. Firms also have to consider the level of price elasticity of demand when setting proper market prices. Other market components being equal, high elasticity should correspond to lower prices and vice versa. In general, this knowledge may serve as a strong basis for further analysis of microeconomic problems. It is necessary both to understand the major economic laws and be able to apply them consistently.