Examining the Changes of Supply and Demand on Equilibrium
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Examining the Changes of Supply and Demand on Equilibrium
Generally, equilibrium in a market comprises the state in which economic forces, notably demand and supply, are balanced. However, this is only possible if outside influences such as government impositions are absent and therefore, do not affect economic variables. Usually, in perfectly competitive markets, the equilibrium is attained normally when the quantity required is equal to the quantity supplied. Specifically, the price of a commodity demanded moves in relation to its supply to a point that both curves intersect and achieve a balanced point. Undeniably, at this mark, the sellers and the buyers are satisfied and seek not to supply or demand commodities based on the effect of the equilibrium price. This creates a competitive state within the market and may persist unless the quantity demanded or supplied increases or decreases, and hence, disrupts the balance between price and demand.
The Law of Demand asserts than a hike in a product’s price will automatically result in a decrease of demand for the commodity in question, if all variables are constant. These variables comprise the determinants of demand and affect the state of equilibrium if they cease to remain unchanged (Pindyck & Rubinfeld, 2013). Particularly, they comprise preferences or tastes among customers, income, price of substitutes, and price in general. Hence, while explaining the law of demand, it is clear that if such preferences remain constant, then it is possible for the law to apply (Frank & Bernanke, 2012). However, this is solely possible in a free market. A real world example that illustrates this involves the commercial relationship between Brazil and the United States in relation to the product, corn. Accordingly, corn undergoes considerable effect from the forces of demand and supply.
In addition to this, the corn industry is a free market based on the free movement of these facets when a factor such as a price in a market changes. As an outcome of globalization, which is a major global event, the demand for the respective product is high due to its contribution in the generation of alternative fuels especially within developed nations (Nuñez, Önal, & Khanna, 2013). Based on this and the effect of globalization, the alterations that may occur in one country may also affect the other. For instance, the recent protests in Sao Paolo, Brazil due to the launch of the Olympic Games later this year (Nuñez, Önal, & Khanna, 2013). Indeed, the cost at which the event takes place has affected low and middle-income people from accessing household goods. In relation to corn, the increase in the prices of this product increased, and in turn decreased the demand for corn in the United States (Nuñez, Önal, & Khanna, 2013).
However, such a price increase only resulted in the boosted supply of corn, which relates to the Law of Supply where a hike in the price of a product influences an increase in the quantity supplied as well. Nonetheless, the reduction of demand due to price increases for corn decreased the equilibrium price of the product. Simply, as the equilibrium price of the product increases, the demand Do shifts to the left indicating that the quantity demanded (Qo) decreases. Alternately, as the equilibrium price for the product increases, the supply curve So moves to the right indicating an increase in the quantity supplied. Similarly, if the price falls, then the demand curve shifts to the right illustrating a decrease in the quantity demanded. Regarding supply, a reduction in the product’s equilibrium price causes the supply curve to move to the left depicting a decrease in the quantity supplied.
In conclusion, the forces of supply and demand impose an effect on the equilibrium state within a free market. While all determinants of supply and demand remain constant, the price movements for a product will affect the equilibrium state by forcing the quantity demanded and supplied to either move. In relation to the production of corn in Brazil, the increased price caused the demand to reduce while increasing the supply. Nonetheless, in order to counter the decreasing demand, the price will have to fall in order to reduce the quantity supplied and in turn, spark an increase in demand for the product.
References
Frank, R. H., & Bernanke, B. (2012). Principles of economics. New York, NY: McGraw-Hill Higher Education.
Nuñez, H. M., Önal, H., & Khanna, M. (2013). Land use and economic effects of alternative biofuel policies in Brazil and the United States. Agricultural Economics, 44, 487-499.
Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics. Boston, MA: Pearson.