economics coursework - demand and supply

8/10/2019 Economics Coursework - Demand and Supply

1/6

1

2. Explain the meaning of supply and demand, and using the mobile phone industry as an example,

explain and illustrate what factors may cause shifts/movements in the curves. The market

mechanism is the tendency for supply and demand to equilibrate, so that there is neither excess

demand nor excess supply. Provide a graphical and written explanation of that statement.

One of the most fundamental principles that exist for economics is demand and supply which

play an important role in the economic decisions.

Demand is the amount of goods a consumer is willing and able to buy. It is connected to wants,

which are the unlimited desires or wishes that people have for goods and services. The amount of a

good or service that consumers plan to buy during a given time period at a certain price is called the

quantity demanded. In contrast to demand, supply is the amount of goods a seller is willing and able

to sell. It reflects a decision about which items to produce. Unlike demand, supply is limited andrelated to resources. The resources and available technology control the amount that firms can

supply. The amount of a good or service that producers plan to sell during a given time period at a

particular price is called the quantity supplied (Parkin 2008).

According to Moffatt (2009) economists define demand as a relationship between quantity of a

good or service consumers will purchase and the price charged for that good. The general

relationship between price and consumption is known as the law of demand which states that:

other things remaining the same, the higher the price of a good, the smaller is the quantity

demanded; and the lower the price of a good, the greater is the quantity demanded. There are two

reasons for this law. First of them is the income effect and the second substitution effect (Sloman2007). To see these effects at work, using a mobile phone industry as an example we can think

about the results of a change in the price. According to Barker (2009), more than 60 percent of the

world's citizens are in posses of a mobile phone. One of the main substitutes of a mobile phone is a

home phone. The cost of mobile phones had dropped 47% between 2003 and 2008, while that of

landlines fell by only 18%. The average mobile bill, at 16.71 a month is lower than the average

landline bill at 21.57. People prefer to substitute landline phones for a mobile phone because is

cheaper (Hussain 2009)the substitution effect. And because the price of a mobile phone falls,

people can afford to buy morethe income effect. The quantity demanded increases for these two

reasons. Similarly if we suppose that a mobile phone cost rises, consumers faced with a tighter

budget, will buy fewer mobile handsetsthe income effect, and will switch to cheaper alternative

goodsthe substitute effect. The quantity demanded decreases for these two reasons (Sloman

2007). We can show graphically how changes in a price affect quantity demanded using one of the

two most used curves in economics: the demand curve which is presented by a downward sloping

line. The movement along the demand curve represents a change in the quantity demanded and it

occurs because the price of the product has changed.


2/6

2

Demand curve

The figure 1 (Cal Poly Pomona 2000) shows demand curve

with quantity demanded on the x-axis and the price on the y-

axis. We can observe as prices increase consumers buy lessand as prices decrease consumers buy more.

However, as well as the price, demand depends on other factors. These factors make changes in

demand which result in shifts in demand to the right or left. One of the main factors is income.

When people earn higher incomes, they are able to afford not only more of the same goods or

services, but also more expensive products they could not afford before (Mastrianna 2007). For

example, consumers with higher incomes can afford to own a cell phone and use more expensive

handsets than people with lower incomes. Americans who earn more are nearly eight times more

likely to have purchased a PDA than those who earn less (Poll 2009). As incomes raise the demand

for mobile phones increases, as incomes fall the demand decreases. Expected future income can

also make changes in demand. If someone gets news that will get a bonus, promotion, etc. can

decide to buy a mobile phone or change it for a more expensive one now. The next factor is theprices of complement goods. For example a complement service for a mobile phone is a mobile

phone service provider. As the prices of phone calls, messages and other mobile phone services

decrease, the demand for mobile phones increases, which results in higher quantity demanded. By

contrast, as the cost of services increases the quantity demanded falls. Changes in future prices also

affect the demand. If the prices of mobile phones are expected to rise, people will buy more mobile

phones now to avoid higher opportunity cost when the prices increase. So, the demand for mobile

phones will increase. Comparably, if the prices are expected to fall in the future, people will retime

their purchase and the demand will decrease today but increase in the future (Parkin 2007).

Population is one of another factors; demand depends on the size and the age of the population. The

bigger the size of a population, the greater the demand. In big cities such as New York or Londonwhere population is 7.5 million, the demand for mobile phones is much higher than the demand is

in smaller cities such as Liverpool (460.000) (Parkin 2008). The research confirmed that age is a

determining factor in cell-phone ownership: 94% of Americans under age 45 have cell phones,

whereas slightly more than eight in 10 Americans 45 or older tote the devices (Poll 2009).

Preferences also play a big role in the demand for cell phones. Aspects such as ease of operation,

physical design and handling influence consumers decision. The more desirable people finda


3/6

3

mobile phone, the more the quantity demanded. For example the large number of features and high

satisfaction increases demand for iPhone. According to Elliot (2009) iPhone caused that Orange UK

made sales records for a phone in UK during the first days of sales.

Shifts in demand curve

The figure 2 (Cal PolyPomona 2000) shows shifts in

demand curve D1. As demand decreases it shifts to the

left D3. An increase in demand is a shift to the right

D2.

In contrast to demand, the law of supply states that the higher the price of a good, the greater the

quantity supplied; and the lower the price of a good, the smaller the quantity supplied. To see these

relations we can use the second of the two most used curves in economics: the supply curve, which

is represented by an upward sloping line. The same as the demand curve, any changes in the price

of a good cause movement along the supply curvea change in the quantity supplied. If the price

of the iPhone rises, it will be worth producing more and incurring higher cost which rises more and

more rapidly with higher output, the quantity supplied increasesa movement along the curve to

the right. If the price decreases, the less profitable it becomes to produce and the quantity supplied

will decreasea movement to the left.

Supply curve

The figure 3 (Cal Poly Pomona 2000) shows the supply

curve (S) with quantity supplied on the x-axis and the price

on the y-axis. As prices increase (B) suppliers produce

more, as prices decrease (A) suppliers produce less.


4/6

4

Like demand, supply is not simply determined by price. Due to other changes (except price), the

supply curve shifts to the rightan increase in supply, or shifts to the lefta decrease in supply.

One of the other determinants is the cost of production. This factor applies to any areas of

production process. According to Hesseldahl (2009) the cost of components of the iPhone normally

goes down from one generation of a product to the next but the cost of the newest iPhone rose by

$5, one of the reasons is that the costs of the components has not declined as quickly as in the pastit causes a decrease in quantity supplied. Credit crunch also makes changes in supply, as it reduces

consumers disposable income sales of mobile phones that are expected to fall. As a result of that

Nokia has announced it will cut cost of production due to falling demand (Skinner 2009). However,

in preparation for the holiday rush, suppliers such as Apple have stepped up iPhone production

(Caolo 2009). Technological advancement is one of another determinants; this means introduction

to new machines and better methods of production. This reduces the cost of production and

increases profit. So the producer is able to supply more goods at the same pricean increase in the

quantity supplied (Mastrianna 2009).

Shifts in supply curve

The figure 4 (Cal PolyPomona 2000) shows shifts in supply

curve S2. As supply decreases it shifts to the left S1. An

increase in supply is a shift to the right S3.

Every market has a stable point when the price balances the plans of sellers and buyers, called

equilibrium point. At this point market is in equilibrium, with no excess demand (shortage) or

excess supply (surplus) in the market. The supply and demand mechanism is the natural

consequences of economic and provides the most efficient economic outcomes. A shortage forcesthe price to rise because consumers cannot push producers to sell more than they plan; therefore

suppliers increase the price which reduces the shortage and rises towards its equilibrium. As the

price approaches the point where there is no longer a shortage, it stops rising. Similarly, a surplus

forces the price to fall. As producers cannot push consumers to buy more than they plan, they need

to lower the price to increase demand. The falling price decreases the surplus and when it meets the

equilibrium point, it does not change anymore (Parkin 2008).


5/6

5

Equilibrium

The figure 5 (Cal PolyPomona 2000) shows the

equilibrium point (E). At any point higher than equilibriumpoint there will be a surplus. And at any point lower there

will be a shortage.

To conclude, supply and demand is the root of all economic pricing. The relations between them

is fundamental is analysis buyers and sellers and of their interactions in a market.

Words: 1517

References:

Barker C. (2009) Sixty percent of the world use mobile phones, Internet WWW page at URL:http://asia.cnet.com/crave/2009/03/10/sixty-percent-of-the-world-uses-mobile-phones/(accessed12/11/08)

Cal Poly Pomona (2000) Market Analysis, Internet WWW page at URL:http://www.csupomona.edu/~mrsafarzadeh/content_w3.htm(accessed 13/11/09)

Caolo D. (2009) Apple amps up iPhone production, Internet WWW page at URL:http://www.tuaw.com/2009/11/01/apple-amps-up-iphone-production/(accessed 21/11/09)

Elliot A. (2009)Orange reveals 30,000 iPhones sold on first day, Internet WWW page at URL:http://www.pocket-lint.com/news/29434/orange-iphone-sales-smash-records(accessed 12/11/09)

Hesseldahl A. (2009) Consumer Electronics Teardowns, Internet WWW page at URL:http://images.businessweek.com/ss/07/01/0118_teardown/2.htm(accessed 20/11/09)

Hussain A. (2009) Is this the end for the landline phone?, Internet WWW page at URL:http://www.timesonline.co.uk/tol/money/consumer_affairs/article6831871.ece(accessed 12/11/08)
http://asia.cnet.com/crave/2009/03/10/sixty-percent-of-the-world-uses-mobile-phones/http://asia.cnet.com/crave/2009/03/10/sixty-percent-of-the-world-uses-mobile-phones/http://www.csupomona.edu/~mrsafarzadeh/content_w3.htmhttp://www.csupomona.edu/~mrsafarzadeh/content_w3.htmhttp://www.tuaw.com/2009/11/01/apple-amps-up-iphone-production/http://www.tuaw.com/2009/11/01/apple-amps-up-iphone-production/http://www.pocket-lint.com/news/29434/orange-iphone-sales-smash-recordshttp://www.pocket-lint.com/news/29434/orange-iphone-sales-smash-recordshttp://images.businessweek.com/ss/07/01/0118_teardown/2.htmhttp://images.businessweek.com/ss/07/01/0118_teardown/2.htmhttp://www.timesonline.co.uk/tol/money/consumer_affairs/article6831871.ecehttp://www.timesonline.co.uk/tol/money/consumer_affairs/article6831871.ecehttp://www.timesonline.co.uk/tol/money/consumer_affairs/article6831871.ecehttp://images.businessweek.com/ss/07/01/0118_teardown/2.htmhttp://www.pocket-lint.com/news/29434/orange-iphone-sales-smash-recordshttp://www.tuaw.com/2009/11/01/apple-amps-up-iphone-production/http://www.csupomona.edu/~mrsafarzadeh/content_w3.htmhttp://asia.cnet.com/crave/2009/03/10/sixty-percent-of-the-world-uses-mobile-phones/


6/6

6

Mastrianna F. (2009) Basic Economics, 15thedition, United States: South Western EducationalPublishing

Moffatt M. (2009) Demand - The Economics of Demand, Internet WWW page at URL:http://economics.about.com/od/demand/p/demand.htm(accessed 12/11/09)

Parkin M. (2008) Economics, 8thedition, United States: Pearson Education

Poll M. (2009) Employment & Age Top Factors in Cell-Phone, Internet WWW page at URL:

http://www.marketingcharts.com/interactive/employment-age-top-factors-in-cell-phone-pda-use-

9678/(accessed 13/11/09)

Skinner C.A. (2009) Nokia to Slash Mobile Phone Production, Internet WWW page at URL:http://www.pcworld.com/businesscenter/article/159450/nokia_to_slash_mobile_phone_production.html(accessed 20/11/09)

Sloman J. (2007) Essentials of Economics, 4

th

edition, United Kingdom: Financial Times/ PrenticeHall
http://economics.about.com/od/demand/p/demand.htmhttp://economics.about.com/od/demand/p/demand.htmhttp://www.marketingcharts.com/interactive/employment-age-top-factors-in-cell-phone-pda-use-9678/http://www.marketingcharts.com/interactive/employment-age-top-factors-in-cell-phone-pda-use-9678/http://www.marketingcharts.com/interactive/employment-age-top-factors-in-cell-phone-pda-use-9678/http://www.pcworld.com/businesscenter/article/159450/nokia_to_slash_mobile_phone_production.htmlhttp://www.pcworld.com/businesscenter/article/159450/nokia_to_slash_mobile_phone_production.htmlhttp://www.pcworld.com/businesscenter/article/159450/nokia_to_slash_mobile_phone_production.htmlhttp://www.pcworld.com/businesscenter/article/159450/nokia_to_slash_mobile_phone_production.htmlhttp://www.pcworld.com/businesscenter/article/159450/nokia_to_slash_mobile_phone_production.htmlhttp://www.marketingcharts.com/interactive/employment-age-top-factors-in-cell-phone-pda-use-9678/http://www.marketingcharts.com/interactive/employment-age-top-factors-in-cell-phone-pda-use-9678/http://economics.about.com/od/demand/p/demand.htm

economics coursework - demand and supply

Documents