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Explain, with appropriate illustrations, how demand and supply curves are determined in simple economic theory. How does the 'equilibrium price' emerge?

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Introduction

Explain, with appropriate illustrations, how demand and supply curves are determined in simple economic theory. How does the 'equilibrium price' emerge? Are the owners of the Safeway supermarkets able to influence the demand curve for their products? This essay focuses on the microeconomics subject of demand and supply divided into 3 parts. The first part is concerned with the explanation of how the demand and supply curves are determined. In this part are given some fundamental definitions and it is introduced the general theoretical aspect of the topic. The second part analyses how the equilibrium price emerges in relation to the demand and supply curves using graph to clarify the theory. Successively, the third and final part applies the previous aspect of the theory to the real market world and examines whether or not Safeway supermarkets owners are able to influence the demand curve for their products. The first part of this essay is concerned with the explanation of the demand and supply curve. For a clear explanation they are first analysed separately and then examined together to establish how the equilibrium price is determined and the relationship between the curves. Sloman (2004) defines Demand as the willingness and the ability that consumers have to pay for a particular good at a given price over a given time period (a week, a month or a year). ...read more.

Middle

In this example the supply curve is held fixed. The factor that shifted the demand curve did not affect the supply. These factors change the demand, increase or decrease, and are graphically represented with a shift to the right or the left of the curve. The direct relationship between the price of a good and the quantity supplied is due to the higher profit gained as the price rises. Thus, a company is encouraged to produce more of a good as it becomes more profitable and reduce the production of other less profitable goods. When the price is kept high over a long period of time, new suppliers enter the market increasing supply. The higher the costs of production, the lower is the profit at each price. Thus, as the costs of production increases, firms decrease the supply and switch to produce goods with lower costs of production and higher profits. Changes in the costs of production can be due to changes of technology, increase or decrease of input prices (such as raw materials, wages and rent), government policy (subsidies and taxes) and when the production is re-organized. (Sloman, 2004; Lipczynski, 2004) The supply of goods produced together, called goods in joint supply, increase or decrease together. When the price is expected to increase in the future, suppliers will stock more now to sell in the future. ...read more.

Conclusion

(Finch, 2004) It is possible to increase the demand through advertising and a marketing campaign. By creating a brand image it is also possible to reduce the elasticity of the demand for their products and reduce the competition and the substitution effect. (Sloman, 2004) Moreover, to attract customers Safeway usually keeps its prices low. However, this is not an increasing in demand corresponding to a shift of the curve, but a movement along the same curve. Safeway had already created a brand name which should guarantee low prices at a good quality to increase and control the demand of their products. (Finch, 2004) To sum up it is possible to conclude that demand and supply are affected by different and common determinant and they are not always predictable. In a free and competitive market economy the equilibrium price is maintain through a natural price mechanism. The equilibrium price and quantity represent the balance between the demand and the supply. The companies that own a large share of the market usually have the control over the prices. These are called price maker. Smaller companies are called price taker. This is usually verified in the perfect competition market structure and monopolistic competition where there are bigger and smaller companies. The government can intervene to prevent and avoid the formation of a monopoly or oligopoly, as in the case of big retail store such as Tesco wishing to takeover Safeways. ...read more.

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