Economics: Law of Supply and Demand

Every human being have unlimited wants or wishes on goods and service. Therefore, demand and supply are the general concept of economics, the demand represented the quantity that the consumers desire. Supply represented how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. So that, there had a law of demand while it is means that if the prices of the goods is higher, the less number of people are willing to buy the product. So, it also means the lower price the firm give, the larger quantity the consumers demanded. Law of demand is covering substitution effect and income effect.

First of all, substitution effect which is means that the demand of goods and services will goes down when the opportunity cost of those goods and services increase. Referring to the histrogram 1, we can stated that Pepsi and Coca-cola is identical goods therefore we also can said that it also a substitution goods. In addition, when the opportunity cost of Coca-Cola rising, people will trying to use Pepsi to substitute for it, so the quantity demanded of the goods and services of Coca-Cola will reducing. Based on the histrogram 1, it can shown that the age group of 70+ of likes between Pepsi and Coca-Cola is same. Therefore we can known that they will switching their preference easily.

    Histogram 1: Pepsi vs. Coca-Cola Facebook “Likes” By Age Group, 2012 (Larson.K) 

On the other hand, income effect which is means that the prices of the goods and services rising will closely relation with the consumer income. So that, sometime the people can effort before but when the prices of goods is rises let them can’t to effort anymore. It also an control for consumer to decide buying the thing they wants. For the example like, when the prices of Starbucks coffee is rises to RM 20 each cup. When the income of most of the people can’t effort to drink it every day, therefore people will change to other coffee shop to drink the coffee. In this changing will let the demand of Starbucks coffee reducing.

According to the graph 1, consumers will escape to buying the product that forces them to give up the consumption of goods they has higher value. The graph 1 shows that the curve is downwards sloping.

Graph 1: Economics Basics: Supply and Demand, 2013

Point A, B and C are on the demand curve. Every point on the curve shows that the correlation between the quantity demanded (Q) and the price (P). According to the point A, the quantity of point A is Q1 and the price is P1, and the point B and point C are so on. The demand curve has represent the opposite relationship between price and quantity. The higher price will get lower quantity and the lower price will get higher demand. Moreover, the curve also shown that the willingness and ability to pay of consumer. So that, the demand curve also can measure the marginal benefit. Thus, there have other of issue can effect demand, which is the prices of related goods, preferences, expected future prices, expected income and credit, income and population.

Everything before changing willl have an issue to effect it. So the issue that effect demand curve is the price. For the example like based on the pie chart 1, we can known as the highest population hour in McDonald is in lunch. As everyone know that the lunch set of McDonald is cheaper than restaurant for the people who are in city area. So that, everyone is prefer going to eat lunch than other time because on other time they can choose another cheaper restaurant to having their meal. 

                              Pie Chart 1 : McLunch, 2011 (MacArthur.K)

Another will effect the curve also related to money, that is income. As common as we know that, when we get the higher income as we can spending more than other. But when the income become lesser, the spending need to be control. So that, due to this issue we can known that handphone is a necessary thing to contact each and other in now technology world. Thus, if your income is higher than you have more selection such as an iphone, samsung smart phone and more but your income is normal your selection will be limited just like nokia basic model 3310. Overall, the decision of buying also depends on your income.

Now we take a look to the Law of Supply shows that the lower price of goods that the firm will produce more and it’s quality will be bad than normal goods but it will be consider in lower level of normal goods. On another way, the high quality that the firms supply it will be the set in higher price due to the cost the high. As that is can be define as a luxury or a normal goods. Which means that the firms only produce the goods that is profitable. It is to avoid the firm meet the unnecessary loss in their production. Based on the table 1, it shown that the highest of sales unit is Perodua and the lowest of sales unit is Honda between January to June 2012. Therefore, we can assume that the Perodua is normal cars and the Honda is luxury cars in this case. Due to the demand of the Perodua is more than Honda, so the producer of Perodua will produce more and get the cheapest raw material. Hence, it can make the cost become even cheaper so the quality will be not so bad but the price will cheapest than before. Since Honda need to maintain the quality of it’s car so the cost of production still higher. It also means that the people who can afford higher price people is not much in Malaysia.

                        Table 1: Top Five Passenger Car Makes, 2012 (MAHALINGAM.E) 

The behaviour of law of supply is more than less the same compare with the law of demand due to they are dependent on price and quantity, but the curve of supply is opposite with demand curve it shown as upward slope, the characteristic of law of supply show on graph 2 below.

Graph 2: Economics Basics: Supply and Demand, 2013

The point of A, B and C are show at the supply curve. Every point on the shows that the correlation between quantity supplied (Q) and price (P). According to the point A, the quantity supply is the Q2 and the price is the P2, and the point B and point C are so on.

          

            Thus, supply also had some issue will effect the curve. One of the issue is technology, since now the technology is very advanced. The advances can let the supply increaing and the curve will move to rightward. So that, the machines can effectively produce the product in short period. Based on the MarketingCharts staff reseacrh that the response rate, selected media shown that the telephone is the highest among all of the selection by June 2012 (2012). In this advanced technology world, smartphone can receive the media as soon as possible. Therefore, most of the people choose to use phone to receive the media because the current technology can let them get the media in a short period. 

    Histogram 2: Response Rate, Selected Media, 2012

Beside that, the number of suppliers also will effect the supply curve. It is due to one people produce the goods, the cost will be more higher. But when everyone is produce the same goods, the cost of the material and the production will be decrease. Example like the price of  clothes is expensive in before, but now the price is reducing until very cheap than before. Due to when the China started to open their market, most of the factory is set up in China, referring to below photo 1 shown that the population of China so many and cheap labor, based on this factor it can reducing much more of cost in production.

       Photo 1 :Workers at New Balance factory, 2012

Reference:

Heakal.R (2013) Economics Basics: Supply and Demand. [Online] Available from: http://www.investopedia.com/university/economics/economics3.asp [Accessed: 1 June 2013]

Larson.K (2012) Spreading Wisdom. What’s the Worth of a Facebook “Like”? Wisdom Has the Answer!. 9 September. Available from: http://blog.wisdom.com/page/3/ [Accessed 1 June 2013]

Mahalingam.E (2012) Higher car sales. [Online] Available from: http://biz.thestar.com.my/news/story.asp?file=/2012/8/13/business/11829164&sec=business [Accessed: 1 June 2013]

Hays.J (2012) Labor-Intensive Industries In China. [Online] Available from: http://factsanddetails.com/china.php?itemid=359&catid=9 [Accessed: 1 June 2013]

Marketing Charts. (2012) Direct Mail Tops Email For Response Rates; Costs Per Lead Similar. [Online] Available from: http://www.marketingcharts.com/wp/print/direct-mail-tops-email-for-response-rates-costs-per-lead-similar-22395/ [Accessed: 1 June 2013]