Understanding of the Concepts of Demand & Supply Model & Elasticity

Question 1- The market system is said to be based on "self-interest". Illustrate and explain what you understand by this statement? Answer - The market system and the self-interest: The market economy is said to be an economy where the individuals are the owners of the capital, land and labour. In the market economy two important factors play a great role and those are, competition and he self-interest. The self-interest is said to be the interest through which the economy is able to obtain the best benefits related to the economy. According to the view Adam Smith, the economy can be benefitted through the self-interest without having any kind of plan for creating the goods and services and the self-interest on the other hand provide benefits to both the consumers and to the producers (Koppl, 2004). There are probably various reasons are present for doing a particular work or producing something for the economy but, the main reason for producing something or doing a particular work is the self-interest of the people. The majority of the economic activities which are observed in the society are done mainly due to the reason of self-interest. Self-interest is not the benevolence of the producer that the producer is producing goods for us but, it is the producers self-interest for which the people are getting the produced products. Seeking the goals is known as the self-interest in the economy and it can be said that the entire market system depends on the self-interest (Cassidy, 2009). Question 2- State what happens to The demand, supply and equilibrium price and quantity? Answer - The demand, supply and equilibrium a. The wheat market In case, the demand for wheat is increased in the market then the demand curve for wheat will be shifted towards the rightward condition. In this case, the overall demand for wheat has been increased and here the quantity demand for wheat is not considered. The overall market demand for wheat has increased and thus the demand curve will shift towards rightward direction. Fig: The shift of demand Source: Author From, the above diagram it can be stated that the initial point of equilibrium was at E0 and the initial price level in the market was P0. The aggregate supply curve ss, cuts the aggregate demand curve dd, in the same equilibrium point which is E0. The market has observed a demand rise and thus the demand curve will be shifted from dd to dd1. The shifted demand curve can produce higher level quantity and thus the price level will be increased in the short run. The new equilibrium is situated at point E1. In the new equilibrium point the quantity demand will be Q1 and the price level will be P1 (Carl, 2012). b. The wool market The wool market has no direct connection with the market of wheat and thus the increase in the demand of the wheat market will not affect the market of wool. The equilibrium price and quantity in the wool market will be remained same even after the changes in demand in the wheat market (Norman, Thisse and Phlips, 2000). Source: Author The equilibrium price and quantity will be similar even after the increase in the demand of wheat and thus the price and quantity are P and Q. c. The market of tractor and the machineries for farm The market of tractors and the machineries for farm will be required more and thus the supply for these two products will increase when the demand for the wheat will increase. From, the figure it is seen that in the initial equilibrium position the price is p0 and the quantity demand is q0. When the demand for wheat increases the supply for the tractors and the farm machineries will also increase and thus there will be a rightward shift of the supply curve. The rightward shift in the supply curve will provide a new equilibrium where the equilibrium price level will be p1 and the equilibrium quantity level will be q1. d. The car market The car market is a luxury market and the demand of wheat would not affect a lot to the car market and the consumers take prolonged time while taking the decision regarding the purchase of car. Source: Author The car market equilibrium will be remained in the same position even after the rise in the wheat demand. Question 3- Show how a knowledge of price elasticity of demand can be use? Answer - Price elasticity of demand is used in various ways by the business firms and the government bodies which are explained below with example: i. usage of price elasticity by business firms The business firms can use the concept of price elastic of demand because; the response towards price change of each commodity is not same in the market. While increasing the revenue of the firm can increase the price of the products and especially, before increasing the price of the products the business firms need to do market research regarding the nature of demand of each product in the product mix (Klein, 1983). The business firms can raise the price of those products which are price inelastic in nature. For example, the necessary goods or the goods which possess high brand value are relatively inelastic in nature. Price inelastic refers that, the in responsiveness of the demand of the product due to the change in price. The business firms together can raise the price of necessary food grains for an example if the government intervention will not be there. Source: Author From, the above figure it is observed that for the products which are relatively price inelastic in nature do not respond well towards the changes in the prices. An increase in the huge amount of prices from p0 to p1 leads a reduction of small amount of quantity from q0 to q1(Norman, etal, 2000). ii. Government while formulation of the policies The objectives of the government for framing the policies are to secure the social welfare and also to enlarge the revenues by collecting taxes. Government generally imposes the taxes on the luxury items and reduces the taxes for the necessary items. The necessary goods are the compulsion consumption for the mass and to secure the social welfare the government must protect the households by reducing taxes on the necessities (Tellis, 1988). For the luxury consumption as the consumption is purely price elastic in nature and the consumers can consume those items when they have excess money in hand, the government earns revenue by imposing higher amount of taxes. Fig: price elasticity Source: Author For example, the consumption of the luxury watches is the subject to tax imposition by the government and the consumption of the watches is the price elastic in nature. From, the above figure it is understood that the small increase in price of the watches has lead to high decrease in consumption from q1 to q0 (Tellis, 1988). Reference Cassidy, J. (2009). How markets fail. New York: Farrar, Straus and Giroux. Koppl, R. (2004). Evolutionary psychology and economic theory. Amsterdam: Elsevier JAI. Carl, S. (2012). Market Structure. Delhi: Orange Apple. Norman, G., Thisse, J. and Phlips, L. (2000). Market structure and competition policy. Oxford, UK: Cambridge University Press. Klein, L. (1983). The economics of supply and demand. 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