HS-108- ECONOMICS

Microeconomics Assignment
Topic: Demand and Supply

Name: Astik Sharma. Batch: B1.

Have you ever noticed the change in price of your daily needed products or decrease in the
quantity, like the number of biscuits in parle g has reduced from 14 to 12, or the price of
heaters, warm clothes etc. start to skyrocket at the start of winter? How the price of
matchbox is still the same after so many years?

The answer to all these questions can be found by a concept called Demand and
Supply. As the name suggests, it studies the effects of changing market conditions on the
price, consumer and producer choice etc. it can help us determine the equilibrium price of a
good and also help firms decide what to produce and how much. So, let us begin.

Types of markets-

all firms buy and sell in market so we must understand types of markets. There are two
main types of market. Factor market and Goods market. Factor markets are markets for
purchase and sale of factor of production. In capitalist private enterprise economies,
households own the factors of production (the land, labour, physical capital, and materials
used in production). Goods markets are markets for the output of production . Firms buy
factors from factor market and use them to produce goods, which are then sold in the
goods market. Firms also use capital markets (markets for long-term financial capital—that
is, markets for long-term claims on firms’ assets and cash flows) to sell debt (in bond
markets) or equity (in equity markets) in order to raise funds to invest in productive assets,
such as plant and equipment. Now let’s peak into some information about demand and
supply.

Basic concepts of demand and supply-At a given price, the quantity of goods
and services that consumers are willing to buy, is generally termed as demand in economics.
On the other hand, the quantity of good the supplier is willing and able to offer to the
market at a specific price is termed supply. We have some mathematical functions and
curves which can help us determine the nature of change in demand and supply with
changing market conditions. Let’s see them one by one.

Demand Curve and Function-

The demand of consumers depends on many variables. The most important of those is the
item’s price. As the price of a good rises, the demand of the good falls accordingly. This
simple rule is known as the law of demand.

Other then the good’s own price, there are some other things that affect its demand.
Such as consumers income and budget constraints, their choice and tastes, the price of
other goods that serve as substitute and complements and so on. By taking note of all these
factors,

we can create a demand function.

When we plot this function changing one variable and keeping others fixed, we get a curve.

And when any other variable gets changed, the curve also shifts. In the given curve, you can
see that as we increase the price, the demand starts to decrease. And any change of income
also affects the demand. In the first graph, when the income increases, the demand curve
shifts from left (d1) to right (d2) and vice versa for the second graph. As the income of
individual rises, they can spend more money on buying goods. Because of this the demand
increases. There is a special case of goods when the increase in income causes decline in the
demand of the product. These are usually inferior quality products. There is a special term
called giffen goods for these products. But it is a thing for later.

Demand for a good also depends on price of other goods which are substitutes or
complements relative to that product. Increase in price of substitute increases the demand
for the good, and increase in price of complement results in decrease in demand of that
good.

For example, if the price of good day biscuit increases but the price of mom’s magic remains
same, then there will be an increase in demand of mom’s magic biscuits.

We also define a term as price elasticity of demand which is the percent change in demand
of a product with 1 % change in its price. It doesn’t only depend on the slope of the curve
but also depends on the quantity demanded and its price at any given point. It is usually
negative in value.

Supply curve and function-

The capacity of goods that a producer is willing to sell at a given price is called supply.
Producers will try to sell the product as long as the cost of production of an additional unit is
lower than the price of that good in the market. So, the supply function also depends on
price as the demand function does. But, instead of fall, there is an increase in supply as the
price of goods increases. Cause as the price increases, the profit of seller on per unit supply
in the market also increases so the seller tries to produce as much as he can.

There are several factors that may cause a shift in a good's supply curve. Some supply-
shifting factors include

• Prices of other goods- the supply of one good may decrease if the price of another good
increases, causing producers to reallocate resources to produce larger quantities of the
more profitable good.

• Number of sellers - more sellers result in more supply, shifting the supply curve to the
right.
• Prices of relevant inputs - if the cost of resources used to produce a good increases, sellers
will be less inclined to supply the same quantity at a given price, and the supply curve will
shift to the left

• Technology - technological advances that increase production efficiency shift the supply

curve to the right.

• Expectations - if sellers expect prices to increase, they may decrease the quantity currently
supplied at a given price in order to be able to supply more when the price increases,
resulting in a supply curve shift to the left.

By taking considerations of all these factors, we can create supply function.

By plotting this function, we can obtain the supply curve.

As we saw earlier, a change in the (own) price of a product causes a change in the quantity
of that good willingly supplied. A rise in price typically results in a greater quantity supplied,
and a lower price results in a lower quantity supplied. Hence, the supply curve has a positive
slope, in contrast to the negative slope of a demand curve. this positive relationship is often
referred to as the law of supply.
Similar to demand elasticity, we define a term as price elasticity of supply, which is the
percent change in supply of a product with 1 % change in its price. It doesn’t only depend on
the slope of the curve but also depends on the quantity supplied and its price at any given
point. It is usually positive valued.

We have seen the demand and supply functions and their properties. Let’s interconnect
these two to get some results.

Market equilibrium-

Do the prices of daily needed products change every day? No!!, mostly the prices stay
constant for an interval of time. But How do we exactly determine the price of a good?
Here comes the concept of market equilibrium. The term itself suggests some kind of
balance. Here it is the balance of quantity demanded by consumers and quantity supplied
by firms. When these two quantities become equal, we say that the market is in equilibrium.
alternative and equivalent condition of equilibrium occurs at that quantity at which the
highest price a buyer is willing to pay is just equal to the lowest price a seller is willing to
accept for that same quantity.
As we have known in the earlier sections, the demand curve shows (for given values of
income, other prices, etc.) a large number of combos of prices and goods that satisfy the
demand function. Similarly, in the case of supply curve, it shows (for given values of input
prices, etc.) an infinite number of combinations of prices and quantities that satisfy the
supply function. Equilibrium occurs at the unique combination of price and quantity that
simultaneously satisfies both the market demand function and the market supply function.
Graphically, it is the intersection of the demand and supply curves as shown in the graph
above.

Now what will happen if the price of the of goods exceed or gets below the balance level? In
that case, the market will have a tendency to come back to its original price. When the price
will get below the balancing level, there will be a rise in demand of that good due to the law
of demand. But the supply will be constant so there will be a Shortage. and when the
demand will exceed the supply, there will be a rise in the price and it will get back to its
original level.

Similarly, in case of increment in the price, the demand will decrease, and then there will be
more goods to sell then needed in market. It will create a Surplus. And due to this there will
be a fall in price and it will get back to where it was.

So, till now we have seen the basic concepts of demand and supply, the demand curve, the
supply curve, types of markets, price elasticities of demand and supply and market
equilibrium. These can help us solve many questions such as –

1. what to produce?

2. how much to produce?

3. at what price to sell the products?

Now we will see some examples to understand the real-life Applications of these terms.

1.Uber’s pricing model-

But what if there is no taxi driver when you need a ride? Or there are many taxi drivers at
the time of less need. How does uber ensures that it has enough drivers to meet its
demand?

One-way uber controls this is through price surging and decreasing. This is a strategy that
uses the laws of demand and supply to match the number of passengers and drivers at a
given time.

Let’s say that at a given time in a given area, people who want a ride exceeds the number of
drivers. In that case the demand for drivers is greater than the supply. Uber may surge the
prices by some percentage. in extreme cases, uber can even double the price. Let’s think
about what happens next, if someone needs a ride and the price is hiked, then he might
rethink of taking uber. Then there will not be so many people to handle than before, at the
same time, uber will send a message to the drivers that the price has been hiked. Means
greater profit for the drivers. So, the drivers will get out of their homes. In this way, the
supply of the drivers will meet the demand.

We can understand the concept of shortage by taking example of a glitch in uber’s model.
Due to a technical glitch, uber’s surge price mechanism was not in work for 26 minutes in
New York city from 1 am to 1:26. Normally it won’t be that great of the deal, but
unfortunately for uber and the lots of people that wanted a ride, it was not a normal night,
the date was 1stJanuary.So, what happened? take a look at the graph given. The X axis
shows the time of day and the y axis shows percentage of requests completed. As you can
see, at 12: 50 am, before the outage, the percentage was almost 100. But in those 26
minutes, it dropped down to less then 20%. And it was again normal after the service came
back. This is an excellent example of what irregularities in price control can do to the market
and its mechanism.
Now let’s take a look at the consequences of not taking the demand of mass into
consideration and being stuck to the same strategy in rapidly changing market conditions.

The failure of Nokia-

It ruled the mobile phone industry like a dictator in its time. It started the revolution in
telecom industry by launching the first ever internet-enabled mobile. Nokia mobiles had
excellent hardware and battery life. The nokia 3000 phone was so durable that even today
there are so many examples given of its strength. It Is even compared with iPhone in terms
of build quality.

Nokia became the biggest cell phone maker in 1998, it even outplayed Motorola. By the
start of 21st century, nokia also launched a touch screen mobile demo. So, what happened
to nokia that it is now almost vanished from the market? Let’s find out.

Nokia was so sure of the consumer base that it had made during all these years, that he did
not find it necessary to make any progress in its r&d. even when other companies were busy
creating new techs and working on their phones, nokia remained unchanged. It was so
confident that people will not use touch screen phones and only QWERTY that it did not find
it necessary to invest in them. Soon, Samsung released its Android-powered array of
smartphones, which were reasonable in price and user-friendly.
This total misunderstanding began the downfall of Nokia. Nokia never decided to accept the
Android operating system (OS) because they did not consider it an advancement. Nokia
launched its Symbian OS, but it was far too behind as Apple and Samsung stamped their
positions. The Symbian OS’s inability to capture consumers’ minds was the biggest reason
for Nokia’s downfall.

Nokia’s deal with Microsoft was another mistake. The old lion king of the jungle sold itself to
Microsoft when they were drowning in losses. Nokia’s sales roared its inability to survive on
its own. Simultaneously, Apple and Samsung were developing with innovation and
technological advancements. It was too late to catch the train for Nokia. The acquisition of
Microsoft is considered one of the biggest blunders, as it did not bear fruit for either party.

Nokia thought higher then actual of its brand value. They thought that people will buy
anything on the name of nokia. Even after the launch of its smartphones, it could not
penetrate in the market as successfully as it thought. This is a lesson for firms to always
keep the demand of people into consideration and make the products according to that.
Also, to keep investing in R%D to meet with the constantly evolving technology.