Question

Question No 6:

Demand and supply are the two basic tools of economics and have wide applications in the field of economics and business. In this context, evaluate any five applications of demand and supply to the practical problems of business and economy. Support your answer with relevant examples.

[Answer in 150 – 200 words]

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Answer 1

Demand of a product specifies how much to consume. Supply, on the other hand, indicates the quantity of supply in the market.

Required applications are as below:

No.1) eliminate the problem of needs: consumers have some demand that is fulfilled and met by supply. Once this is done, the economy would be in equilibrium. From consumers’ perspective, the product has some utility; and from suppliers’ perspective, this is the way of earning revenues. Example: there is the demand of 5,000 units of banana, which is met at a price of $2 each.

No.2) reduces the problem of price control: suppliers can only able to supply if there is demand; therefore, usually they can’t charge high price, since demand would only be there where the price is low. The government doesn’t need to price control there. Example: supply and demand met (equilibrium) at $2 price; therefore, the suppliers can’t charge $3 price.   

No.3) application of price control: sometimes equilibrium price may not be ideal – this may be high for consumers or low for suppliers. Adequate price control may be implemented there by the government and this is done through the base point of equilibrium. Example: Suppose the $2 price is very low for suppliers; the government imposes a price floor of $5.

No.4) stage of an economy: the functions of demand and supply indicate how the economy is doing – is it growing or declining. Example: the aggregate demand of the country falls because of the decrease in money supply.

No.5) stage of a business: these two functions and their movements tell how the business is doing. Example: suppose the business has to increase production by 2,000 units because of an increasing demand.