Figure 2. Change in Demand
Figure 2 shows a change in demand, represented by a shift in the demand curve. A decrease in demand causes the whole demand curve shifts to the left, from D0 to D1. At the given price P0, it is seen that the quantity demanded falls from Q0 to Q1. With a decrease in demand, the quantity demanded will be lower at each and every price.
An increase in demand means that the whole demand curve shifts to the right, from D0 to D2. At the given price P0, it is seen that the quantity demanded rises from Q0 to Q2. With an increase in demand, the quantity demanded will be higher at each and every price.
Conclusion.
In conclusion, to distinguish between a change in quantity demanded and a change in demand, we have to look at the factor that causes the change as well as its effect on the demand curve. A change in quantity demanded occurs in response to a change in the price of the good itself while a change in demand occurs in response to a change in one of the variables affecting demand, other than the price of the good itself. A change in quantity demanded is also illustrated by a movement along a given demand curve while a change in demand is shown by a shift in the demand curve.
Part (b)
Introduction
We have seen in part (a) that demand factors can affect the price of a good. However, that is only half the story, as we also have to consider supply side factors as well. There are demand as well as supply factors that influences the market equilibrium price of mobile phones.
What is the definition of market equilibrium price?
Equilibrium is defined as the state of balance where there is no inherent tendency to change unless demand or supply changes.
Market equilibrium price it the price at which the quantity demanded by the consumers equals the quantity supplied of the producers.
What are the demand and supply factors that affect the market equilibrium price of mobile phones?
Demand factors include consumers' taste, prices of substitutes, prices of complements, change in real income of consumers, expectations of the consumers and availability of credit.
Supply factors includes the number of producers, the state of technology, producers’ expectations and cost of relevant resources.
Consumers' Taste
Consumers’ taste is a demand factor that would affect the market equilibrium price of mobile phones. A change in consumers’ taste would cause a change in demand, shifting the demand curve. Consumers' taste may change due to personal preferences, fashion trends or advertising. Consumers prefer to own mobile phones because of the convenience that they offer. It is also considered fashionable to be seen with the latest model of a mobile phone. Heavy advertising by mobile phones producers also help make mobile phones more desirable to consumers. All these factors would cause the market demand for mobile phones to increase.
Price of substitutes
Price of substitutes is another demand factor that affects the market equilibrium price of mobile phones. Substitutes are goods that can be used in place of another good. Examples of substitutes for mobile phones are public telephones and pagers. A change in the price of substitutes would also affect the demand for mobile phones. If the cost of using public telephones or the price of pagers were to increase, this would increase the market demand for mobile phones.
Prices of complements
Price of complements is another demand factor that affects the market equilibrium price of mobile phones. Complements are goods that are used in conjunction with another good. The subscription fee and the call charges are complements for mobile phones. If the subscription fee or the call charges decrease, the market demand for mobile phones will increase.
Change in consumers' real income
A change in consumers’ real income is also a demand factor that affects the market equilibrium price of mobile phones. Mobile phones, in general, would be considered as a normal good. As consumers' real income increase, more people would want to own a mobile phone. As a result, the market demand for mobile phones will increase with an increase in consumers’ real income.
Expectations of consumers
Expectations of consumers is also a demand factor that affects the market equilibrium price of mobile phones. If consumers expect the prices of mobile phones to rise in the future, they may decide to buy their mobile phones now in order to avoid the price hike. As a result, the current market demand for mobile phones will rise.
Availability of credit
Availability of credit is also a demand factor that affects the market equilibrium price of mobile phones. If consumers are able to buy mobile phones on credit and pay by installments, mobile phones will become more affordable to the consumers and the market demand for mobile phones will rise.
Illustrate this with a diagram
A rise in the demand for mobile phones will cause the demand curve to shift to the right, from D0 to D1 as shown in figure 3. This will cause both the equilibrium price and quantity to rise from P0 to P1 and from Q0 to Q1 respectively.
Figure 3. An increase in the demand for mobile phones
The state of technology
The state of technology is one of the supply factors that affect the market equilibrium price of mobile phone. The state of technology represents the economy's stock of knowledge about how resources can be combined most efficiently. If technology improves and a more efficient method of production is discovered, it will take fewer resources to produce the same amount of output as previously, and cost of production will fall. Producers will then be able to supply more of good at each and every price due to the lower cost of production. The supply will increase and this is reflected by a rightward shift in the supply curve. Improvement in technology makes it cheaper to manufacture mobile phones, thereby increasing the supply of mobile phones.
Cost of relevant resources
Cost of relevant resources is another supply factor that affects the market equilibrium price of mobile phone. Relevant resources are those resources employed in the production of a good, such as labour, raw materials and other capital goods. Changes in wages, prices of raw materials, fuel and power, will affect the cost of production. A fall in the price of electricity, for instance, will reduce the cost of operating machines used in the production process. As a result of the lower production cost, producers can either have to charge less for the same quantity supplied or they will be willing to sell a more of the good for each and every price of the good. For example, lower cost of labour in China and Malaysia allows mobile phone producers to increase their supply by locating their manufacturing plants in these countries.
The number of producers
The number of producers will also have an effect on the supply curve. Since the market supply is the sum of the amount supplied by all producers, market supply depends on the number of producers in the market. If the number of producers increases, the supply curve will shift to the right; if the numbers decrease, it will shift to the left. As more Japanese, South Korean and Taiwanese manufacturers enter the mobile phone market, the market supply will increase.
Illustrate this with a diagram
A rise in the supply of mobile phones will cause the supply curve to shift to the right, from S0 to S1 as shown in figure 4. This will cause both the equilibrium price to fall from P0 to P1 and the equilibrium quantity to rise from and from Q0 to Q1.
Figure 3. An increase in the demand for mobile phones
Effects of an increase in both demand and supply on the equilibrium price.
If the demand and supply for mobile phones were to increase, the equilibrium quantity will incrase. However, whether the equilibrium price will rise or fall will depend on which factor, demand or supply, is more dominant.
If the increase in demand is more dominant and supply, then the demand curve will shift by a greater magnitude than the supply curve as shown in figure 5. In this case, both the equilibrium price and quantity will be higher.
Fig 5. Shift In Demand Dominates
However, if the shift in supply is more dominant, then the supply curve will shift by a greater magnitude than the demand curve as shown in figure 6. In this case, the equilibrium price will be lower but the equilibrium quantity will be higher.
Fig 6. Shift In Supply Dominates
Conclusion
The market equilibrium price of mobile phones is affected by both demand and supply factors. If only demand increases, then the market equilibrium price will be higher. If only supply increases, then the market equilibrium price will be lower. However, if both demand and supply increase, then the market equilibrium price will be determined by the more dominant factor.
