Economics Supply and Demand

Running Head: SUPPLY AND DEMAND AND PRICE ELASTICITY

Supply and Demand and Price Elasticity

Supply and Demand and Price Elasticity

Supply and demand is the basic principle of economics that most people are aware of. However, there exists a more detailed list of factors that determine supply and demand that most people might not be familiar with. The following will discuss the changes in supply and demand as well as answer questions about the market equilibrium, multiple market systems, and the effects that goods and their substitutes have on price elasticity.

The most fundamental definition of supply and demand is described by The NetMBA Business Knowledge Center (2002) Web site as being: “The price level of a good essentially is determined by the point at which quantity supplied equals quantity demanded.” For example, if Bob has a gallon of water in the middle of the desert and is surrounded by five thirsty people, the demand for water is high while the supply is low therefore, allowing Bob to charge a higher rate. The thirsty people are willing to pay more for this scarce water and will do so. On the other hand, if Bob travels to the Amazon River basin where fresh drinking water is plentiful he will not be able to charge much, if anything, for the same gallon of water. The price of an item is tied in directly with the market's current equilibrium for that particular item.

The market equilibrium of a product is where the supply and demand curves meet each other on an economic chart. The Business Dictionary (2007) describes market equilibrium as having neither a shortage nor surplus of any particular item, therefore, "there is no innate tendency for the price of the item to change." In an economy that produces 200 hundred tires per week in an area that needs 200 hundred tires per week equilibrium is easily reached.

Economics consists of four major market systems: perfect competition, monopolistic competition, monopoly, and oligopoly. In a...