Question

Examine a product that has recently changed prices when you were at the grocery store in the past week. Analyze one determinant of supply and demand that has created the price to increase or decrease in your example. How did the change in demand or supply affect the market price in your example?

This assignment will require you to write an analysis with a minimum of 3-5 paragraphs in APA format. You will need to focus on your analysis and address each aspect of the question. You will be graded based on your analysis and how well you answered the questions. You will submit a one-page document

Answer 1

Price Elasticity

Increased prices typically result in lower demand, and demand increases generally lead to increased supply. However, the supply of different products responds to demand differently, with some products' demand being less sensitive to prices than others. Economists describe this sensitivity as price elasticity of demand; products with pricing sensitive to demand are said to be price elastic. Inelastic pricing indicates a weak price influence on demand. The law of demand still applies, but pricing is less forceful and therefore has a weaker impact on supply.

Price inelasticity of a product may be caused by the presence of more affordable alternatives in the market, or it may mean the product is considered nonessential by consumers. Rising prices will reduce demand if consumers are able to find substitutions, but have less of an impact on demand when alternatives are not available. Health care services, for example, have few substitutions, and demand remains strong even when prices increase.

Exceptions to the Rule

While the laws of supply and demand act as a general guide to free markets, they are not the sole factors that affect conditions such as pricing and availability. These principles are merely spokes of a much larger wheel and, while extremely influential, they assume certain things: that consumers are fully educated on a product, and that there are no regulatory barriers in getting that product to them.

Public Perception

If consumer information about available supply is skewed, the resulting demand is affected as well. One example occurred immediately after the terrorist attacks in New York City on September 11, 2001. The public immediately became concerned about the future availability of oil. Some companies took advantage of this and temporarily raised their gas prices. There was no actual shortage, but the perception of one artificially increased the demand for gasoline, resulting in stations suddenly charging up to $5 a gallon for gas when the price had been less than $2 a day earlier.

Likewise, there may be a very high demand for a benefit that a particular product provides, but if the general public does not know about that item, the demand for the benefit does not impact the product's sales. If a product is struggling, the company that sells it often chooses to lower its price. The laws of supply and demand indicate that sales typically increase as a result of a price reduction – unless consumers are not aware of the reduction. The invisible hand of supply and demand economics does not function properly when public perception is incorrect.

Fettered Markets

Supply and demand also do not affect markets nearly as much when a monopoly exists. The U.S. government has passed laws to try to prevent a monopoly system, but there are still examples that show how a monopoly can negate supply and demand principles. For example, movie houses typically do not allow patrons to bring outside food and beverages into the theater. This gives that business a temporary monopoly on food services, which is why popcorn and other concessions are so much more expensive than they would be outside of the theater. Traditional supply and demand theories rely on a competitive business environment, trusting the market to correct itself.

Planned economies, in contrast, use central planning by governments instead of consumer behavior to create demand. In a sense, then, planned economies represent an exception to the law of demand in that consumer desire for goods and services may be irrelevant to actual production.

Price controls can also distort the effect of supply and demand on a market. Governments sometimes set a maximum or a minimum price for a product or service, and this results in either the supply or the demand being artificially inflated or deflated. This was evident in the 1970s when the U.S. temporarily capped the price of gasoline at about $1 per gallon. Demand increased because the price was artificially low, making it more difficult for the supply to keep pace. This resulted in much longer wait times and people making side deals with stations to get gas.