Changes in Market Equilibrium
The interaction of the forces of demand and supply determines the equilibrium price and quantity in a perfectly competitive market. A market is in equilibrium when no buyer or seller has any incentive to the change in the commodity that he or she buys or sells at the given price.
The equilibrium price of a commodity is the price at which the quantity demand of a commodity equals the quantity supply and the market clears. The process by which the equilibrium is reached is shown by the intersection of the demand and supply curve of the commodity.
Summary of the Video
The video "Changes in Market equilibrium" shows the shifts in the demand and supply curve due to changes in the price and quantity of the product apple. The video explains the different scenarios where the change in the supply of apple causes change in price of the commodity. For example, when a new disease resistant apple is available in the market then it affects the suppliers. They increase the supply of apple and the supply curve shifts to the right and the price decreases. Again in a different situation the release of a study that states that apples are cancer resistant fruit affects the demand of the commodity. So the demand of apple increases and the demand curve shifts to the right. The price increases and the quantity of apple also increases. The third case is the scenario when the pear cider industry launches an advertisement campaign. If the advertisement campaign is good one then the demand for apple cider decreases and the producers of apple produces less of it. This leads to the decrease in the demand of apple cider thereby shifting the demand curve towards left. Now the farmers who are supplying apple changes their farming to pear which is more profitable in the present scenario. So the supply of apple decreases and the supply curve shifts to the left. In this case the price remains the same but the quantity decreases. But if the supply decreases to a large extent then the price increases. Thus in all situation quantity decreases but the price varies. In another case, the rise in wage rate among the apple pickers cause problem on the supply side which leads to the decrease in the supply of apple thereby shifting the supply curve to the left. The quantity of apple decreases but the price increases.
Microeconomic and Macroeconomic Principles
Two microeconomic principles that are applied in the simulation video are consumer behavior and revenue. The simulation shows how the tastes and preferences of the consumer changes and the effects on the demand curve and the supply curve. For example, the change in the behavior of the consumer is observed when apple was researched as cancer resistant product. The demand increased leading to the increase in the price of the product. In another scenario when the production of apple cider decreases it affects the revenue generated from the product and decreases the profit.
Two macroeconomic principles that applies to the video are price ceiling and wage rate. A price ceiling below the equilibrium price causes the shortage of the product apple and also leads to black marketing. But a price floor above the equilibrium price leads to the surplus of the commodity. The other macroeconomic concept is the wage rate influencing the demand and supply of the product. If the wage rate increases the price of the product also increases which affects the supply of the product. There will be shortage of apple in the market due to rise in wage rate.
Shifts in demand curve and supply curve
There are different changes in the demand and the supply curve in the simulation. The demand curve shifts to the right when the demand of apple increases due to factors like decrease in the price of the product, increase in supply , benefit of the product while it shifts to the left when demand of the product decreases due to the rise in prices, less quantity supplied etc. Again, the supply curve shifts toward right when supply increases due to rise in the production of the apple i.e. when farmer produces more apples and shifts toward left when supply of apple decreases due to decline in the production of the product.
Cause of shift and the effect on Price, Quantity and Decision making
The demand and supply curve always show the relationship between the price and quantity of the commodities. The price and quantity affects the availability of the product and the amount at which the product is to be purchased. It allows to take decision whether the price is within the budget of the consumer and for the producers whether to produce the product depending on the demand. It also helps the businesses or the producers to generate more profit and for the framers to get more return by farming the product.
Applying the video in real world product
The sharp decline in the coffee prices caused millions of coffee farmers and their families in the developing countries into extreme poverty but the multinational companies such as Nestle and coffee shops like Starbucks earned huge profit. The problem arose in the coffee market as supply of coffee increased faster than the demand of the product causing the coffee prices to fall. As coffee prices fell faster than quantities increased, the earnings of the coffee farmers declined. This happened during the year 1999 to 2001. This shows how the demand and supply of the product affect the market .
Microeconomic Factors
The microeconomic concepts help to understand the demand of a particular product , in the decision making process and to understand why the supply of the product is going down.
Macroeconomic Factors
The macroeconomic factors help in understanding the business of the product. It helps to understand the method of the production process, the quantity that the business will produce, and how wage rate influences the market supply of the product.
Price elasticity
Price elasticity of demand is defined as the measure of the responsiveness in the quantity demand of the commodity due to change in the price of that commodity. In the simulation the importance of price elasticity of demand is shown by the change in the demand of the product due to change in the price. When the demand of apple decreases then the price of the product decreases thereby decreasing the supply of apples. If the demand increases there is change in the price of the apple i.e. either increase, decrease or remaining same and the supply of the apple also increases or decreases. The substitute of the product like pear causes the supply to decrease and the consumers pay high price to purchase the product apple.
References
Salvatore, Dominick (2003). Microeconomics Theory and applications. New York: Oxford University Press
Dornbusch, Rudiger( 2005). Macroeconomics. New Delhi: Tata McGraw-Hill.
Changes in Market equilibrium. Khan academy, Week 1
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