Demand and supply
In economics demand is not only willing to buy product but also an ability to buy. A lot of factors affect demand: product price, price of other products, taste and lots of other facts that vary according to product or service. Movements along demand curve are only caused by change in price of product (see appendices graph 1). Increase in price known as conjunction and decrease as expansion. However shift of the demand curve are caused by change in price of another products, advertising, house hold income (see graph 1). Shift to the right represents increase in demand, to the left its decrease (Ison and Wall, 2007).
Supply is a quantity of product or service which company is willing and able to provide in the market. Price of product, price of other products, costs, technology etc are factors that affect quantity supplied. Supply has upwards sloping curve (see graph 3). It has most factors like demand curve in terms of movements and shifts, apart from mentioned above. Suppliers are willing to supply more at higher price because they can get more profit (Begg, Fischer and Dornbush, 2003).
Market Equilibrium
After looking on demand and supply separately we can put them together on one graph. At point where demand equals supply is Market Equilibrium (see graph 4). Disequilibrium situation can happen when one factors of demand or supply change. It leads to excess of demand or excess of supply (see graph 6). If P1 moves to P2 and quantity supplied increases because suppliers are willing to supply more at higher price, but consumers are not willing to pay for product at that price. So they demand less, therefore supply exceed demand and this condition is known as excess of supply. Same situation happens when P1 moves to P3. Suppliers are not willing to supply more at lower price because profit is not that encouraging the, but demand increases because of price reduction. So there is a gap between low supply and high demand which called excess of demand.
II. Answer A
As we discussed PED above, now we are interested in elasticity of goods and inelasticity, main reasons and effects on them. Main reason is type of goods. For example petrol is inelastic product because demand for it is high and no matter what is price people are going to buy it. However if the price is too high consumers probably going to consume less, but they are not going to stop using petrol. If we look on some products like coffee, and lets assume that price of brand X done up by 5% probably demand will fall by 20% because demand for coffee is elastic. It is also due to high competition and superior goods. So first reason is price. Another reason is type of good. There are 2 main types of good merit and demerit E.g. merit goods are NHS, schools; demerit goods are alcohol and tobacco. Merit goods are usually under consumed, but they are beneficial for consumers. Usually demand for them elastic. However demerit goods can be over consumed if government do not intervene and demand for them is more inelastic. Second factor is nature of products. Thirdly is price of another products e.g. if can of Coca-Cola is £1 and can of Pepsi is £0.90, demand for coke can fall because of product price of their competitor. However we need to consider taste of customers and their loyalty to products. If they are loyal to coke and love its taste they won’t buy Pepsi because of price. Therefore demand is not only driven by price etc. But also intangible factors like taste, customers loyalty etc...
III. Answer B
When government tax product they need to take into account who pays it, how much etc. For some product tax paid fully by consumer or producer, or 50% each of them. It depends on elasticity and types of good as well as profit on those goods or services (Ison and Wall, 2007). For instance price of a chocolate bar is £1. Government tax is 10p if they decide to increase tax by 6p. Therefore seller needs to put the price on by 6p to gain same profit. In this case seller and buyer are paying half of tax.
Who pays tax determines elasticity concept. If goods are perfectly elastic, producer pays all tax because if consumer pays any tax, demand falls (Begg, Fischer and Dornbush, 2003). We can see that relationship on (graph 7). However if demand is perfectly inelastic it is fully paid by consumers because at any price product demand is not going to fall (Begg, Fischer and Dornbush, 2003). For instance if we look on (graph 8), movement of price prom P1 to P1+t(tax) does not affect quantity demanded because of elasticity, so tax is paid by consumers.
Tax on goods is depends on types of goods which are merit and demerit goods. Merit goods are those that are beneficial for consumers like education, NHS. Demerit goods are those that could be over consumed and harmful for buyers. Usually merit goods have lower tax to encourage consumption and mostly tax is paid my producer. On the other hand demerit goods are highly taxed and tax is paid by consumers (Ison and Wall, 2007). For example: cigarettes, alcohol.
Income elasticity of demand takes quiet major part in determining tax. Government have to take in to account how to tax good that are in a basket. Basket is a known set of goods that are consumed by most of population (Ison and Wall, 2007). Those goods are usually having elastic demand and have low tax, so people can afford them. As we discussed before as income increases consumer might switch from inferior goods to more quality and higher price products.
To the company to decide which price to charge firs of all they look on price elasticity of demand and income elasticity of demand. Company is interested in profit so they want to get same amount of profit after if they don’t pay tax. Firm use different scenarios to determine the price and profit they want to achieve. They want to know how price and income will affect demand and fiend best middle on charging best price with best return in other words sales.
IV. Conclusions
To conclude as was mentioned before demand can be elastic or inelastic which depends on type of product: merit and demerit, luxury of normal good and goods in basket. PED and YED are tools to measure responsiveness of quantity demanded based on price and income respectively. They are used to determine price, tax charges and who should pay them.
V. Appendices
Graph 1
Demand 1
Graph 2 (http://seattlecentral.edu)
A. B.
Graph 3 (http://3.bp.blogspot.com)
S1
Graph 4 (http://www.bized.co.uk)
Graph 5 (Ison and Wall, 2007)
Graph 6 (Lecture slide, week 2)
Graph 7 (http://www.econ.iastate.edu)
Graph 8 (http://www.econ.iastate.edu)
References
Begg D., Fischer S. and Dornbush R., 2003, Economics, 7th edition, America 1221 Avenue: McGraw Education.
Ison S. and Wall S., 2007, Economics, 4th edition, Edinburgh: Pearson Education
Graphs references
2
3
4
5 Ison S. and Wall S., 2007, Economics, 4th edition, Edinburgh: Pearson Education
6Lecture slide, week 2
7
8 http://www.econ.iastate.edu/classes/econ301/Deiter/U4HmwrkKeyF08_files/image004.jpg
