Question

discuss the core economic tools used in the classic microeconomic theory: Demand, Supply, and Market Equilibrium. Discuss how the market equilibrium works in the chemical industry... Who creates the demand and who the Supply of the goods/services you are providing? How does the market reach equilibrium?

Answer 1

Demand- Is the total quantity of goods that the consumer is willing/ desires to purchase.

Determinants of Demand

When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.

1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods.

2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.

3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease.

4. Price of related goods:

a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.

Example: If the price of coffee rises, the demand for tea should increase.

b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.

Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.

5. Expectation of future:

a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.

Law of demand-

The law of demand governs the relationship between the quantity demanded and the price. This economic principle describes something you already intuitively know. If the price increases, people buy less. The vice-versa is also true. If the price drops, people buy more.

But price is not the only determining factor. The law of demand is only true if all other determinants don't change.

b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.

Supply-Supply is the total quantity of goods that the seller is willing to sell in the Market.

Determinants of supply-

1.Own Price-Firstly, the most important factor that influences the supply of a commodity is its own price. And the relationship between supply and own price is a direct one.

2. Price of related goods-Secondly, supply of any commodity largely depends not only on own price of the commodity but also on the prices of its substitute and complementary goods.

If market price of wheat rises, the jute farmers would be interested in wheat production so that in the next season they can increase the supply of wheat. On the other hand, in the case of a joint product, a rise in the market price of mutton will increase the quantity of leather supplied.

3.Price of Raw materials/input/intermediate goods-Thirdly, price of inputs is also an important determinant of supply. If the price of an input (say, wage bill) rises, the cost of production will surely increase. Consequently, profit will tend to decline. Seeing an unprofitable situation, a firm will reduce the supply of a commodity and will try to switchover to the production of another commodity which is still not unprofitable.

4. Technology-the state of art or the technology has an important bearing on the supply of a commodity. As newer and modern technologies are employed in a concern, production and productivity rise and average costs of production tend to decline. This result in a change in quantity supplied.

5. Government Policies-Finally, by imposing taxes on firms, the government can affect the supply of a commodity. The government may ask business firms to pay taxes for polluting the atmosphere or for meeting government services on education, health, etc. As these taxes increase costs, firms reduce supplies. Similarly, subsidies may be given to firms so that they can produce goods needed by the society.

Often new firms are encouraged to produce some goods (e.g., software) by giving subsidies to these goods or by reducing taxes. Further, the government may use its regulatory device (e.g., industrial licensing) to control the activities of business firms. This affects supply.

Law of supply-all other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping.

Market equilequilibrium- is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market. If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results in a disruption of the equilibrium.

Market equilibrium In chemical industry-

Chemical industry will be in equilibrium when the demand for the chemical required would be equal to the quantity supplied.

CONSUMERS create the demand and supplier creates the supply.

The market reaches equilibrium when quantity demanded= Quantity supplied