Price Elasticity Of Supply And Demand

Improved Essays
The principle of supply and demand helps economists predict changes in the open market. Supply and demand directly affects prices in the open market. When supply exceeds demand, such as when fruit and vegetables are in season, prices fall. On the other hand, when demand exceeds supply, as with gold, prices rise. It is important to balance supply and demand for any business to succeed long-term. To further examine supply and demand, one can analyze aspects of the market for milk.
Before analysis of the market for milk can be completed, one must be sure he/she understands a few terms important in the discussion of supply and demand. “The law of demand states that as price increases (decreases) consumers purchase less (more) of the specific
…show more content…
“Price elasticity of demand is how economists measure the responsiveness of quantities demanded to changes in prices” (Dilts, 2004). It has been established that a change in price can cause changes in demand. Elasticity helps one determine how much of an impact will be made. This can be illustrated easily. Little Johnny drinks four cups of milk every day regardless of the price change for milk. In this example the demand does not change because of the change in price. For this reason, this particular market for milk is inelastic. “Some goods remain in constant demand regardless of the changes in the price. Demand for these goods is called inelastic” (Shmoop Editorial Team, 2008). There are some items that are too important to daily life to be significantly affected by price. To a certain point, these items of importance can differ from consumer to consumer. For instance, if a family has a large desire to consume beef, then they will continue to purchase beef regardless of price fluctuations. On the other hand, a vegetarian family would not purchase beef whether the price is low or high. It is important to understand that an inelastic item does not necessarily remain inelastic over a long-term period. If the price of an inelastic item, such as Johnny’s milk, continues to rise, then it will reach a point where an alternative may be cheaper (almond milk). At that point, Johnny’s market becomes elastic. An item that is elastic is more sensitive to price changes. The elasticity of an item can be calculated using a simple equation. One can calculate elasticity by using the equation E= (Change in Quantity/((Q1+Q2)/2)) / (Change in Price/((P1+P2)/2)). To further illustrate the effectiveness of the equation, on need to simply use an example of a change in the market. Suppose the price of milk increases from $2.00 to $2.80 per gallon

Related Documents

  • Improved Essays

    Preparing the budget will also give Fonterra an idea of where it needs to focus more. For example, in the current situation as there is surplus of milk, it should slow down its production a little and find ways to store the existing milk so that proper balance is maintained. This means it needs to concentrate and spend more on the budget for storing the milk. As a result, planning for the budget also helps identifying the areas which needs more attention. Thus resources are properly allocated which also helps in avoiding…

    • 813 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    If his income decreases than before, he will choose to buy other necessaries. Furthermore, the elapsed since the change of price can also influence the price elasticity of the product. If a consumer is used to buy high in sugar content that helps to a price change more elastic demand for the good. Q2 (c) The size of burden relies on price elasticity. The following two diagrams will show how price elasticity of demand will play a role in determining the size of the burden on…

    • 2092 Words
    • 9 Pages
    Superior Essays
  • Improved Essays

    Demand Assumptions

    • 790 Words
    • 4 Pages

    In contrast, to the above graphical representation and the law of demand assumption; if the consumers have advance information about the possible future increase or further increment in the price of cheese, consumers might purchase huge quantities of cheese depending on its durability. This will leads to artificial increase in demand for cheese despite its increase in price today. This will be represented in the graph below : P s D1 D2 Q Therefore, a consumer will only respond to price, as price is the factor that influence the quantity demanded over certain period of time. schiffman and Kanuk (2007).However, the income and substitutes…

    • 790 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    It is measured as percentage change in quantity of a product demanded divided by proportion change in the price of the product. Price elasticity helps supervisors to know how changes in price of a product will influence the entire transactions of the product. This vision helps the executives to regulate the prices of special products that will bear extreme profit for their…

    • 1746 Words
    • 7 Pages
    Great Essays
  • Improved Essays

    Supply, demand, and elasticity can be one of the most fundamental elements in economics which linked by marketing acts. Begg (2014: 43) states that demand is the amount of goods or services the buyers are willing to buy at an acceptable price. And the supply is the amount of goods or services the producers are willing to sell at an acceptable price. The main purpose of this essay is firstly explaining what is supply, demand and elasticity and how they influence the market. Then take Hanjin shipping as an example to analyze the causes and consequences of receivership.…

    • 997 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    Effects of the United States monetary policy and fiscal policy on the financial performance of Johnson and Johnson Looking at the short-term trend of Johnson and Johnson we can see that the current monetary and fiscal policies are affecting the company’s performance as the different changes in the policies creates drawback for short-term investments which Johnson and Johnson do in retailing of their products to pharmacies on retail. While on the long-term trends the policies allow them to create a steady profit. I would say that a contracting monetary policy would do no good for Johnson and Johnson financially but the expansionary monetary policy would help in creating a better financial report for Johnson and…

    • 1251 Words
    • 5 Pages
    Superior Essays
  • Improved Essays

    Aggregate Demand

    • 1467 Words
    • 6 Pages

    Aggregate demand is the plotting of the actual production of an economy. The real GDP and price levels are used when determining what products or services are in a demand. If prices are high are things that are considered a supply in demand the GDP will contract verius if the prices are low the GDP will expand. Econmoists believe that the downward slopping of an aggregate demand is beneficial to our country. The economists have three theories that are affected by aggregate demand, wealth effect, interest rates and foreign exchange.…

    • 1467 Words
    • 6 Pages
    Improved Essays
  • Improved Essays

    Price fluctuation: discounts and promotion prices in forward buying may cause distortion. Rationing and shortage gaming: suppliers usually resort to rationing, which in turn provides incentives to buyers to inflate orders. Further, supply chain lacks coordination if each stage optimizes only its local objectives. Accordign to Rao (2015), “Bullwhip effect reduces the profit of a supply chain by making it more expensive to provide a given level of product availability”. It can be effect by increasing costs for the supply chain by indicators listed bellow, which will be end with…

    • 1072 Words
    • 5 Pages
    Improved Essays
  • Great Essays

    At point E, quantity demanded equals quantity supplied and the price of goods that customers are willing and able to buy equals the price of goods that sellers are willing and able to sell. The market price helps to solve the economic problem because people who want to get the goods or services have to be willing and able to pay the price. This means price addresses the 4 production decisions: “What to produce?” “How to produce?”, “How much to produce?” and “To whom distribute?”. For example, if the price of water increases, people and farmers will use water more efficiently. Price can control the demand of goods and services, because going with the increasing of price is the decline of demand.…

    • 1185 Words
    • 5 Pages
    Great Essays
  • Improved Essays

    Williams states, “Anything someone does to move away from the Standard American Diet will make a huge difference in terms of diabetes, hypertension, obesity, and heart disease.” Saturated fat also resides in animal products. The increased amounts in the body no matter how small hold linkage to heart disease where arteries clog with fat and plaque. Vegans consume healthy fats that include nuts, seeds, and avocados. If they do not rely their diet on processed foods and oils then they significantly decrease their chance of food related diseases. The argument that meat contains important nutrients like iron and B12 exemplify a safe way for people to eat it, but because of fat and cholesterol the consequences greatly outweigh meat as a sufficient source for these nutrients.…

    • 765 Words
    • 4 Pages
    Improved Essays

Related Topics