Concepts of Supply and Demand Essay Example | Topics and Well Written Essays - 2500 words

Concepts of Supply and Demand - Essay Example Figure 1.0 below shows in detail what the elasticity of demand portends for the price and quantity of a given item as a function of graphic analysis. Of course it cannot always be understood that price elasticity of demand will be a primal motivating factor (Fouquet, 2012). Due to the fact that the market for many goods and services has a very inelastic price elasticity of demand, the actual level of demand that consumers express bears little relation to the price that is being offered for the commodity. Figure 1.0 Source: Marban, Zwaan, Grigoriev, Hiller, & Vredeveld, 2012 This particular graph is indicative of an elastic demand curve. It is important to bear in mind that the demand curve is not steeply sloping; rather, it exhibits a gradual decline as price fluctuates. Naturally, determinants such as consumer time horizon will greatly impact the total elasticity that is represented in the above representation by elongating and flattening the demand curve as a result of the fact tha t the consumer believes that the cost is likely to change within the near future (Chai & Moneta, 2010). Similar changes to the demand curve will also be noted if/when changes to the consumer’s income are noted and/or if the availability of substitutes weakens or strengthens the demand that has hitherto been illustrated. Cross price elasticity Similarly, â€Å"cross price elasticity† is a term that is used to measure the responsiveness of the demand for a given good to the change in price of a competing good. This level of change is given as a percentage point and is derived as a function of measuring the percentage change in price of the secondary good/commodity (Marban, Zwaan, Grigoriev, Hiller & Vredeveld, 2012). As a quick example, if the price of shipping were to increase by 10% and the price of the finished good itself were to decrease by 25%, the following formula would be used to calculate the cross price elasticity of the given good: -25/10= -2.5. In this way, the reader can see the level to which competing goods/commodities play with relation to the elasticity of demand for a given product within the marketplace (Khan, 2012). An important fact to note is that the question of whether the cross price elasticity is positive or negative denotes whether or not the given good/commodity in question is either complimentary or supplementary of the primary good. Negative cross elasticity means that two products are compliments whereas a positive means that they are supplementary to each other. Figure 2.0 represents the graphical interpretation of cross price elasticity. Figure 2.0 Source: Arak & Spiro, 1973 Income elasticity Thirdly, this brief analysis will consider the term â€Å"income elasticity.† This can be described as the responsiveness of demand for a given good or service to the change in the overall income of the individuals who are demanding the item. In much the same way as the previous term was calculated, income elasticity is calculated as the percentage change in the demand as compared to the percentage change in the income of the affected consumer base (Fouquet, 2012). In this way, the observer could calculate a 10% increase in income as compared to the demand for a good increasing by 20% as 20%/10%=2. Figure 3.0 illustrates the decreasing demand for a product as a function of reducing incomes of the affected population that would otherwise serve as the primary consumers of the given good/service/commodity. Figure 3.0 Sources: Fouquet, 2012 Increases in consumer spending/income would