Both supply and demand is one of the important concepts of economics and also the backbone of the market economy. Supply shows how much can be offered by the market and the quantity supplied means the amount a supplier is willing to supply to a consumer of a product at a specific price. Demand shows how much of a product is desired by a consumer and the amount demanded refers to quantity of products consumers are willing to purchase at a given price. This paper explains how the diminishing marginal utility, diminishing returns and elasticity helps to explain shapes of demand and supply curves.
The law of diminishing marginal utility occurs when a person increases the consumption level of a product while keeping constant the consumption of other products. There is a reduction in the marginal utility that an individual gets from consuming each of the additional unit of the good. This utility may decline up to a negative utility, since it may be unfavorable to consume the other unit of any product. Hence, the first unit of any products consumption is highest, each next unit consumed holds less and less utility. For utility level to be maximized the consumer is assumed to be rational in this case trying to get the most value for the money they give, facing budget constrain since their incomes and resources are limited, they have clear preferences for the goods and services they need and the other assumption is that each item has a price tag hence consumers should be able to choose from the alternatives.
The degree in which supply and demand curve changes in reaction to prices is called elasticity
The elasticity of demand and supply curves equation
Elasticity = % change in quantity/ %change in the price
When a tennis ball 1$ each, Mary is willing to purchase 10 ball, and Agnes is willing to sell also 10 balls. When each costs $ 1.50 each, Mary is willing to purchase 6 balls and Agnes is also willing to sell 20 such balls.
The percentage change in price = (1.50-1) =0.5/1 =0.5= 50%
The percentage in quantity= 6-10 = -4/10 = -40%
(-40%/50%) = -0.8
Elasticity of demand = 0.8
Elasticity of supply
% change in price = 1.50-1= 0.5/1= 0.5= 50%
% change in quantity = 20-10 =10/10= 1= 100%
Elasticity of supply =2
The determinants of the price elasticity of demand include necessity whereby the higher the necessity for a good, the lower its price elasticity, the price change duration whereby the non-durable products , the elasticity tends to be higher over the long-run than over short-run, presence of substitutes products here the elasticity will be higher when there are more substitutes of a good or a service, the brand loyalty the attachment to a specific brand can override the sensitivity to the price changes, resulting to more inelasticity.
The determinants of the price elasticity of supply include the availability of the materials here when the materials are limited can also limit the products that can be produced, time responding here if the producer has a lot of time to respond to the price changes the product will therefore more elastic, substitutes this shows how easily one person can change from one product to another and shows how inelastic or elastic a product is. At the point when cost falls the aggregate income increments and a fall in cost when the request is value inelasticity dependably prompts a lessening in the aggregate income.
The generation work do relates the variables information sources' amount that is utilized by the business to the measure of the subsequent yield. The law of decreasing negligible profitability expresses that while expanding one contribution of creation and keeping different data sources steady may at first increment the yield, when the info are further increment it will have a restricted impact and it will in the end have no impact or a negative impact on the yield.
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