(Source: depositphotos)
First
of all, what is demand and supply? Both demand and supply are one of the most
basic concepts that can be learnt in economics. In fact, the concept of demand
and supply can be seen in anywhere around the world. Demand exists whenever
there is a desire towards a product or service by consumers, whereas supply
exists when there is at least one producer that is able to provide the desired
product or service of consumers. Besides that, quantity demand refers to the
number of goods that consumers are willing to purchase given the certain price,
whereby the relationship of quantity demanded and price is called the demand
relationship; while quantity supplied is the number of products which suppliers
are willing to supply to the market at a particular price, where the relationship
between quantity supplied and price is known as the supply relationship. In
today’s blog post, I would be discussing about factors that can provide changes
in the demand and supply of a product and how it can affect the economy market.
First
of all, I’d briefly explain about two laws: the law of demand and the law of
supply. The law of demand states that when the price of a particular good
increases, the demand of that good will decrease instead, and vice versa. The
changes in price will then show a movement of quantity demand along the demand
curve, such as illustrated below:
As
for the law of supply, a direct relationship can be seen between price and
quantity supplied of the product. It explains that when the market price of the
product increases, suppliers would provide more of their goods to the market so
they could gain more revenue, and vice versa. The changes in price of goods
will then display a movement of quantity supplied along the supply curve just
as the graph below:
(Source: Econmentor)
Even though price is an obvious factor that can affect people’s decision about the amount of goods they should purchase or sell at that particular price, it is important to remember that price only affects the quantity demanded and quantity supplied of a good, it does not affect the overall demand or supply of the good. Instead, there are a few determinants that are able to affect the overall demand or supply of a product. Some of the determinants of demand are the income of consumers, price of related goods, consumers’ taste and expectations of consumers; whereas some of the determinants of supply would be the number of suppliers, expected future prices of the goods, cost of the products and technology. All these determinants can affect the overall demand and supply by causing a shift in the demand or supply curve accordingly. A shift of the demand curve to the right would mean that the demand towards the good has increased whereas a shift to the left would mean the demand towards the good has decreased; this shifting concept also applies to the supply curve in the same manner too, just like how the two graphs below were illustrated:
Even though price is an obvious factor that can affect people’s decision about the amount of goods they should purchase or sell at that particular price, it is important to remember that price only affects the quantity demanded and quantity supplied of a good, it does not affect the overall demand or supply of the good. Instead, there are a few determinants that are able to affect the overall demand or supply of a product. Some of the determinants of demand are the income of consumers, price of related goods, consumers’ taste and expectations of consumers; whereas some of the determinants of supply would be the number of suppliers, expected future prices of the goods, cost of the products and technology. All these determinants can affect the overall demand and supply by causing a shift in the demand or supply curve accordingly. A shift of the demand curve to the right would mean that the demand towards the good has increased whereas a shift to the left would mean the demand towards the good has decreased; this shifting concept also applies to the supply curve in the same manner too, just like how the two graphs below were illustrated:
(Source: Kapitalism101)
As you can see, there is an intersection point between both curves, and this point is called the equilibrium point, whereby the actual price of the good and the actual amount of the good being bought and sold are identified in a competitive and free market (Sloman, Wride & Garnett, 2012). In other words, the equilibrium price is actually the price whereby the quantity demanded and the quantity supplied of a product is the same. But due to the certainty that there are a number of factors being able to affect the supply and demand of the product; therefore enabling either a shortage or a surplus of the good to occur in the market.
As you can see, there is an intersection point between both curves, and this point is called the equilibrium point, whereby the actual price of the good and the actual amount of the good being bought and sold are identified in a competitive and free market (Sloman, Wride & Garnett, 2012). In other words, the equilibrium price is actually the price whereby the quantity demanded and the quantity supplied of a product is the same. But due to the certainty that there are a number of factors being able to affect the supply and demand of the product; therefore enabling either a shortage or a surplus of the good to occur in the market.
A
shortage refers to the situation where there is a difference between the
quantity demand and quantity supply of a particular good. This is due to the
price of a particular good in the market which is lower than the equilibrium
price and the demand towards that good is high. This usually happens when the
quantity demanded of a product has increased while its quantity supplied
remained unchanged. Another possibility is that the quantity supplied of the
good had decreased but its quantity demand is still the same and there are no
changes in it. When there is a shortage of goods, the graph will be looking
like this:
(Source: Ingrimayne)
Cases of shortages have been occurring all around the world, under many different circumstances. One example would be when there was a shortage of sugar in Malaysia about three years ago (The Star, 2010). According to the online newspaper, it seems that there was a high demand towards sugar because of the upcoming festive seasons the Malaysians were going to celebrate. To solve this shortage problem, it was also stated in the news that the government had decided to increase 10 percent of the sugar supply to all the retailers and also wholesalers in the country for approximately three months. Another example can be seen in France, whereby Hermes International was facing difficulties trying to manage the rapid increase in demand of consumers around the world (Roberts, 2011). To overcome this problem, Roberts had reported that Patrick Thomas, the CEO of the company, had revealed to build two more leather factories in the country in the following year so as to meet the high demand of the consumers.
Cases of shortages have been occurring all around the world, under many different circumstances. One example would be when there was a shortage of sugar in Malaysia about three years ago (The Star, 2010). According to the online newspaper, it seems that there was a high demand towards sugar because of the upcoming festive seasons the Malaysians were going to celebrate. To solve this shortage problem, it was also stated in the news that the government had decided to increase 10 percent of the sugar supply to all the retailers and also wholesalers in the country for approximately three months. Another example can be seen in France, whereby Hermes International was facing difficulties trying to manage the rapid increase in demand of consumers around the world (Roberts, 2011). To overcome this problem, Roberts had reported that Patrick Thomas, the CEO of the company, had revealed to build two more leather factories in the country in the following year so as to meet the high demand of the consumers.
(Source: WikiSpaces)
When
companies are facing shortages, they would carry out decisions that are able to
bring both quantity demand and quantity supply to an equilibrium once again.
Regarding to the two cases above, both companies faced an increase in demand,
whereby the demand curve had shifted to the right. Thus, both companies decided
to increase their production in order to meet its consumers’ demands. By
increasing its supply, there will be a movement along the supply curve until it
meets up with the new demand curve at a new intersection point, therefore
creating new price equilibrium for both curves. In the demand-supply graph, the
changes are shown as below:
(Source: StudyBlue)
A surplus is also a situation where there is a difference between the quantity demand and quantity supply of a product too. However, this is because the market price of the product turns out to be higher than of the equilibrium price, therefore giving producers the belief that they should increase their number of supplies in hopes of being able to earn more revenues. In this scenario, the quantity supplied of a product has then increased whereas its quantity demanded remained the same as before. Another situation would be where quantity demand of a product has fallen yet its quantity supply still remains unchanged. When a company is facing a surplus in its goods, the demand-supply graph will be illustrated like this:
A surplus is also a situation where there is a difference between the quantity demand and quantity supply of a product too. However, this is because the market price of the product turns out to be higher than of the equilibrium price, therefore giving producers the belief that they should increase their number of supplies in hopes of being able to earn more revenues. In this scenario, the quantity supplied of a product has then increased whereas its quantity demanded remained the same as before. Another situation would be where quantity demand of a product has fallen yet its quantity supply still remains unchanged. When a company is facing a surplus in its goods, the demand-supply graph will be illustrated like this:
(Source: Ingrimayne)
In the real world, there have been some cases whereby companies were facing a surplus in products. For example, there was a surplus in production in the European stainless steel industry. According to Stubben (2011), the industry has been facing this problem because the demand towards the material did not increase as there were issues regarding of a debt crisis. To solve this problem, the reporter had announced that a few companies have already decided to reorganize its business system so that they are able to get rid of the excess production of stainless steel. Other than that, there is also a case where cement companies in India were facing a surplus in its goods. Kamat (2010) had reported that when the monsoon had even begun to strike the country, the prices of cement have been decreasing already. Not only that, due to the low in demand of cement, the cement companies ended up having an excess of goods that couldn't be sold.
In the real world, there have been some cases whereby companies were facing a surplus in products. For example, there was a surplus in production in the European stainless steel industry. According to Stubben (2011), the industry has been facing this problem because the demand towards the material did not increase as there were issues regarding of a debt crisis. To solve this problem, the reporter had announced that a few companies have already decided to reorganize its business system so that they are able to get rid of the excess production of stainless steel. Other than that, there is also a case where cement companies in India were facing a surplus in its goods. Kamat (2010) had reported that when the monsoon had even begun to strike the country, the prices of cement have been decreasing already. Not only that, due to the low in demand of cement, the cement companies ended up having an excess of goods that couldn't be sold.
In
cases of facing a surplus in production, companies are also required to look
for solutions in order to sustain their businesses. To eliminate the surplus of
production due to the decrease in demand of goods, both companies in the cases
mentioned earlier should find a way to decrease their amount of production so
that price equilibrium can be achieved once again, similar to how the graph
below has shown:
(Source: EconomicsOnline)
As a conclusion, there are many ways to affect the demand and supply of a good. Not only that, those changes can cause problems such as shortage or surplus of goods to occur. In this current economy, everything is unpredictable due to the high competition around and the wants of consumers can always change in any moment. Therefore, companies should be highly aware so that if there were to be any sudden changes in the economy that will affect their business, they would be prepared to embrace those changes by coming up with various alternatives that would be able to help them maintain their position in the market.
As a conclusion, there are many ways to affect the demand and supply of a good. Not only that, those changes can cause problems such as shortage or surplus of goods to occur. In this current economy, everything is unpredictable due to the high competition around and the wants of consumers can always change in any moment. Therefore, companies should be highly aware so that if there were to be any sudden changes in the economy that will affect their business, they would be prepared to embrace those changes by coming up with various alternatives that would be able to help them maintain their position in the market.
(Source: FCEE)
References
Kamat,
V. (2010) Cement companies facing impact of excess production capacity. Live Mint [online] 23 June. Available
from: http://www.livemint.com/Money/3MdaFCnnm1qv1WTCIhtC4K/Cement-companies-facing-impact-of-excess-production-capacity.html
[Accessed 5 June 2013].
Roberts,
A. (2011) Bloomberg. Available from: http://www.bloomberg.com/news/2011-11-04/hermes-raises-full-year-sales-target.html
[Accessed 6 June 2013].
Sloman, J., Wride, A. and Garratt, D. (2012) Economics. Eight Edition. Harlow, Essex:
Pearson Education Limited.
Pearson Education Limited.
Stubben,
C (2011) Metal Supply. Available
from: http://www.metal-supply.com/article/view/68850/european_stainless_industry_facing_surplus_production_capacity
[Accessed 6 June 2013].
The Star (2010)
Sugar supply to be increased from Thursday. [online] 29 June. Available from: http://thestar.com.my/news/story.asp?file=/2010/6/29/nation/20100629155404&sec=nation
[Accessed 5 June 2013].
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