Supply And Demand Essay

1562 Words 7 Pages
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
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“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

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