Concepts of Economics: Economics for Business
Answer:
Introduction
The two most fundamental concepts of economics are termed as demand and supply. Demand and supply are considered as the backbone of the market economy. The quantity of a good or a service that is desired by the purchasers is termed as demand. Demand refers to the amount that the consumers are willing to buy at a certain price. On the other hand, supply refers to the quantity that can be offered by the market (Bowen & Sosa, 2014).
In this case, the demand and supply of the CD will be evaluated and the factors that are affecting the demand and supply sides of the market. Suppose a special edition of a CD of one of the most famous band is released for $30. In this case, the company will take into consideration the previous analysis of the customers. As per the analysis, the company will launch only ten CDs, as the customers will not demand the CDs at a price higher than $30. In this case, the opportunity cost is also too high for the suppliers to produce more. However, if 30 individuals demand ten CDs then it will lead to the increase in the price. This is because, as per the demand relationship, the increase in the demand will lead to the increase in the price (Arnade & Cooper, 2013).
The increase in the price will lead to the increase in the supply of the CDs. This is because, the individuals are willing to purchase the CDs at the higher price and in order to meet the demand, the supply needs to be increased (Basnet & Seuring, 2014).
Figure: The Increase in the Demand Leads To the Increase in the Price
(Source: Created By Author)
In the above graph, it can be seen that the increase in the demand leads to the increase in the price. However, if the demand remains the same in spite of the increase in the supply that is the production of the CDs increases to 40 but the demand is still at 30, then the price will not be increased. This is because the demand is less than the supply. Hence, the producers will lower the price of the CDs. They will try to sell the leftover 10 CDs. Once the price of the CDs is reduced, the individuals will start purchasing the CDs at the lower cost (Mayer et al., 2014).
Figure: The increase in the supply leads to the decrease in the price
(Source: Created By Author)
In the above graph, it can be seen that the increase in the supply leads to the decrease in the price. However, the demand remains the same.
Figure: Equilibrium
(Source: Created By Author)
The graph shows that the Equilibrium point is reached once the supply equals the demand.
The factors that affect the demand sides of the market are as follows:
Change in income – The demand for the CDs will increase if the income of the customers increases. The increase in the income will lead to increase in the demand of the CDs as the CDs are considered luxury goods (Karadja et al., 2014).
Advertising – The most important factor in this case is advertising, as the demand for the CDs will increase with the help of an effectual advertising. An effectual advertising will lead to the decrease of the competing goods.
Changes in Taste and preferences – The increase in the demand of the CDs will depend completely on the taste and preferences of the customers. If the customer prefers to listen to the songs that are offered by the company then the demand for the CDs will increase. However, if their taste changes in that case the demand will get affected that is it will decrease (Bohi, 2013).
Shift in the demography of the market – The demand for the luxury goods like CDs depends completely on the demography of the market. In other words, it depends on the age of the individuals. The youth will prefer to listen to modern songs that will increase the demand for the CDs providing the songs.
Expectation – Expectation is the factor that alters the demand of the customers. If the customer expects the price of a product to increase in the future, then it will alter their demand.
Substitute goods and services – If another company also sells CDs and that too by offering the songs that are highly accepted by the population in that case the demand will be affected. The substitutes will act as the competitor for the company.
Complementary goods and services – The demand for the CDs will decrease if the customer prefers to hear the same songs in the mobile phone. They might prefer to download the songs instead of paying money to purchase the CDs (Cai et al., 2012).
The factors that affect the supply sides of the market are as follows:
Cost – Cost is one of the most vital factors that affect the supply of the product. If the cost of the CDs increases, it will shift the supply curve to the left.
The number of producers – If the number of companies producing CDs increases, in that case the supply of the CDs will increase.
Conclusion
It can be thus concluded that the supply refers to the quantity that can be offered by the market and in this case, the suppliers are the producers of CDs. The increase in the price will lead to the increase in the supply. If the demand is less than the supply, then the price will also get decreased. If the income of the customers increases, then the demand will increase.
References
Arnade, C. A., & Cooper, J. (2013). Price Expectations and Supply Response. In 2013 Annual Meeting, August (pp. 4-6).
Basnet, C., & Seuring, S. (2014). Demand-Oriented Supply Chain Strategies–A Review of the Literature. Available at SSRN 2464375.
Bohi, D. R. (2013). Analyzing demand behavior: a study of energy elasticities. Routledge.
Bowen, W. G., & Sosa, J. A. (2014). Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press.
Cai, G., Dai, Y., & Zhou, S. X. (2012). Exclusive channels and revenue sharing in a complementary goods market. Marketing Science, 31(1), 172-187.
Karadja, M., Mollerstrom, J., & Seim, D. (2014). Richer (and holier) than thou? The effect of relative income improvements on demand for redistribution. Review of Economics and Statistics, (0).
Mayer, T., Melitz, M. J., & Ottaviano, G. I. (2014). Market size, competition, and the product mix of exporters. The American Economic Review, 104(2), 495-536.
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