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Describe how equilibrium occurs using the supply and demand framework. Use this framework to explain movements in the price of wheat over the past 15 years.
1522 words
Supply and demand is the backbone of a market economy. Demand refers to the want, need or desire for a product backed by the money to purchase it. The quantity demanded is the amount of goods and services that consumers are willing to buy at a certain price. The interconnection between price and quantity demanded is the demand relationship. Supply refers to the amount of a product made available for sale by firms. The quantity supplied are the amount of goods that suppliers are willing to supply at a certain …show more content…
The graph above shows the needed amount of wheat, 610 MMT and the supply of wheat at 590 MMT. The rising price reduces the shortage because it decreases the quantity demanded and increases the quantity supplied. The high wheat prices caused an increase in price of daily consumed food items such as bread, noodles and etc. Both major and minor business were affected as price of supply was forced to be increased. Some nations like Egypt were affected badly as their main course meal involves heavy use of wheat.
Prices are more likely to increase or decrease significantly during the beginning of a new year. This is because, global ending inventory influences the prices of wheat heavily. If the global ending inventory is significantly low, then the price of wheat will be significantly high and this is a scenario of a shortage. If the global ending inventory is significantly high, then the price of wheat will be significantly low and this is a scenario of a surplus. The graph below shows the global ending stocks and price of the past …show more content…
As at 2014, the population of the world was estimated at 7,260,652 people. The price of wheat often fluctuates because there are constant changes in demand and supply affected by population. It often fluctuates to have an equilibrium price. The graph below shows the world population, supply and demand of wheat:
This graph data is extracted from www.worldbank.org & www.uswheat.org.
In this scenario, firms often try and reach an economy of scale to optimize production and overall operations. Marginal costs of production will keep decreasing as production increases until the company has to incur more costs to produce more products. As seen in the above graph, it is evident that there is more supply than demand of wheat. With an expected continuous increase in population, most investors will take this opportunity to stock up wheat today as wheat prices are expected to increase in the future.
In conclusion, movements in wheat prices are affected by supply and demand of the market. Consumers and suppliers are the main players in this game of economy. Meeting the equilibrium price is the fundamental objective of supply and demand in a