Discuss the role of demand Essay Example for Free

Discuss the role of demand Essay In this paper we discuss the role of demand and supply in determining equilibrium price and quantity in the market, in a free market the demand and supply determine the equilibrium price and demand, in this case we consider 2,500 apartments which are to be leased out at a rate of 1,100 per month. If we assume that this is the equilibrium price and quantity in the market we can derive our demand and supply curve to determine the various factors that will affect the equilibrium price and quantity. From the above diagram the intersection of the demand curve and supply curve give us the equilibrium quantity and the equilibrium price, if the price was to rise then the demand for the apartments would decline, if the price was to decline then demand would be high for these apartments. The adjustment of the free market is automatic because when the supply rises then prices decrease, when prices decrease then the demand increases forcing the prices to rise, therefore in the long run the free market is at equilibrium, the factors that affect this equilibrium therefore include demand, supply, prices and charges by other competitors. Change in demand: When demand increases there will be an increase in the level of prices, this is caused by the fact that as the demand increase then the demand curve shifts to the right as shown below, when the demand increases then the prices increase, when prices increase then more apartment builders will be encouraged to increase supply of apartments resulting into increased supply, increased supply will shift the supply curve to the left leading to a decline in prices, therefore in the long run the curves will adjust into a new equilibrium, this is shown in the diagram below: When the demand for houses increase then the demand curve shifts from demand curve 1 to demand curve 2, this increases the prices, as the price increase investors are encouraged to invest more and provide more apartments, this results into increasing supply, when supply increases due to the increased prices the supply curve shifts downwards from supply curve 1 to supply curve 2, the new equilibrium now is where demand curve 2 intersects with supply curve two. Our new equilibrium is at a lower price yet a higher quantity. This clearly shows how the market shifts as a result of change in the demand for apartments. Changes in supply and demand: Changes in the supply is caused by the price, when the price rise then the supply level increases, when the price declines then the supply level declines. On the other hand the demand is also affected by prices, when prices decline then the higher the demand and when the price rise then the lower is the demand. Shifts in the demand and supply curve will affect decision making, this is because as economists we will aim at producing at the most optimal position, the optimal point will be determined by the maount of revenue derived from the apartments, the higher the price the higher the revenue per aprtmetn yet the lower the revenue the lower the revenue per apartment, however total revene will be calculated by multiplying the demand with price. Four points emphasized: When demand increases prices will rise, When the prices rise then the higher the supply, The higher the supply the lower the price and The lower the price the higher the demand Application: This concept of demand and supply can be used to determine the result of an increase in the price of product or even a reduction in the price, however our above analysis is that of a normal good, therefore in the workplace we can determine what wll happen to the demand and revenue after an increase or decline in prices. Elasticity of demand: Price elasticity of demand is the responsiveness of demand to a change in prices, the hgher the price elasticity then the hgiehr the demand wil respoind to a change in prices, however the lower the price elasticity then the lower is the responsiveness to a change in price. Results: From the above discussion we have summarized the law odf demand and supply for a normal good, it is evident that for a normal good when demand increases prices will rise, when the prices rise then the higher the supply, the higher the supply the lower the price and finally the lower the price the higher the demand. References: Brian Snow (1997) Macroeconomics: Introduction to Macroeconomics, Rout ledge publishers, London Philip Hardwick (2004) Introduction to Modern Economics, Pearson Press, New York Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, New York