Market Economics Demand and Supply

Question: Discuss about the Market Economics Demand and Supply. Answer: Introduction The two most important and basic concept of economics is demand and supply. They are also considered as the backbone of the market economy. Demand is referred to as the quantity that the purchasers are ready to purchase at the specified price. On the other hand, supply is referred to as the quantity that the producers are willing to supply at a certain price. Price is referred to as the most important determinant of demand and supply (Bowen Sosa, 2014). Figure 1: Demand and Supply (Source: Created by Author) Demand and supply is explained with the help of a given product of Apple (IPhone 5).The image of Apple was stained during the launch of IPhone 5 mainly because of the demand and supply of the product. During its launch, it was expected that the supply of IPhone 5 would be more than 10 million however; it was only 5 million units. Figure 2: Shortage of Supply (Source: Created by Author) The graph shows that the demand for IPhone 5 is more than its supply and as a result, it had lead to shortage of supply. However, Apple will be able to make more sales as the quantity demanded is expected to be 10 million units. In that case, Apple needs to supply 10 million units of IPhone 5 to reach the equilibrium point. Equilibrium point is mainly reached when demand of a product equals its supply. As a result, Apple will also be able to maximize its profit at the equilibrium point where there is neither overproduction nor underproduction. However, the shortage of supply will result in the increase of price that will make IPhone 5 too expensive (Ghose Han, 2014). However, the demand for IPhone 5 in a country as Australia will be inelastic as the people in Australia mainly considers Smartphone as a luxury product. The average income in Australia is quite high as compared to most of the countries and as a result, the individuals in Australia are capable to afford IPhone 5 irrespective of the price. As a result, the elasticity of demand of IPhone 5 in high-income countries is considered inelastic. However, in countries that have average income IPhone 5 has elastic demand. Hence, when the prices of IPhone 5 are considered to be too expensive the product has an elastic demand. On the other hand, if the prices are considered to be reasonable, the product will have an inelastic demand (Thimmapuram Kim, 2013). Figure 3: Inelastic Demand (Source: Created by Author) The graph shows inelastic demand where the change in price will have a little effect on the quantity demanded. On the other hand, the price elasticity of supply will be considered as elastic for IPhone 5. This mainly because, the firm will produce more as it will cost less to produce an additional output as the demand rises. Figure 4: Elastic Supply (Source: Created by Author) The graph shows the price elasticity of supply of IPhone 5. The supply has become elastic due to high increase in demand. As a result, the supply is not able to catch up with the demand instead of the increase in production. However, if the demand for IPhone 5 will fall the elasticity of supply will become inelastic (Simon, 2015). Although, in Australia the people mostly prefers luxurious and costly Smartphone like IPhone, there are few countries where IPhone has close substitutes however, they do not have a perfect substitute. The major competitor of Apple is Samsung that operates on Android system. With the increase in price, the demand for IPhone decreases but it does not decrease to zero. However, if the price increases by a large amount the individuals with average income might shift to its substitute. Figure 5: Substitute goods (Source: Created by Author) The graph shows that with the increase in price if the individuals shifts to android phones, the demand curve will shift to the left from D to D1. The factors that affect the demand side of the economy include the price of the product. In other words, if the price of IPhone increases the demand will decrease and vice versa. This is mainly because price and demand are inversely related. The demand will fall with the increase in price as the satisfaction level of the customers will fall. The price of related goods is also considered as the most important factor that determines the demand for a good. Related goods include both substitute and complementary goods. In the case of Apple, the major substitute good is Android. As a result, if the price of IPhone increases the demand for Android phones increases. On the other hand, complementary goods are those goods that are used together to satisfy a particular demand. Hence, if the price of Smartphone increases the demand for IPhone will decrease (Witt, 2013). Income of the customer is another most important determinant of demand. If the income of the customers increases, the demand for IPhone will also increase and if the income decreases, the demand for IPhone will decrease. Expectation of change in the future price will also determine the demand for IPhone. In other words, if individuals expect that the price of IPhone is likely to increase dramatically in the future then the present demand for IPhone will increase (Rios, McConnell Brue, 2013). The factors that affect the supply side of the economy are the increase in price. In other words, if the price of IPhone increases, Apple will increase the supply to generate more revenue. A decrease in the cost of production also affects supply that is when the amount payable to factors of production decreases, profitability of the company increases. State of technology also determines the supply of a product that is a more advanced technology will reduce the cost of production and increase profit. The other most important factor is taxation policy that if government increases tax, the cost of production will increase, thus reducing supply (Canto, Joines Laffer, 2014). Conclusion It can be concluded that Apple needs to supply 10 million units of IPhone 5 to reach the equilibrium point. At which supply will equal demand. As a result, the company will be able to generate more profit. The demand for IPhone will also increase and if the income decreases, the demand for IPhone will decrease. With the increase in price, the demand for IPhone decreases and demand for Android will increase. References Bowen, W. G., Sosa, J. A. (2014). Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press. Canto, V. A., Joines, D. H., Laffer, A. B. (2014). 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