Market Dynamics: Demand, Supply, and Elasticity Analysis
Factors Influencing Demand Changes
Demand changes are driven by several variables: taste, price, the price of substitutes, household income, access to credit, and other factors.
Market Reactions to Price and Scarcity
- Raising the price: When there is excess demand (scarcity or escazes), and there is no stock, the price rises. Consequently, the quantity demanded falls and the quantity supplied rises until the excess demand disappears.
- Falling demand for money: For example, the stock accumulation effect. In this cause-effect scenario, three things occur: prices lower, the quantity demanded increases, and the quantity supplied falls until the accumulation of stock disappears.
Supply Dynamics and Market Surplus
Supply (Offer) changes based on production costs, competition, technology, and other variables that can influence the market.
Oversupply and Supply Reductions
- Increase in supply and Oversupply: This leads to an accumulation of stock. To resolve this, prices lower, the quantity supplied decreases, and the quantity demanded increases until the accumulation of stock disappears.
- Supply falls (Cae la oferta): This creates scarcity (escazes). As the price rises, three effects occur: the quantity demanded falls, the quantity supplied increases, and the scarcity disappears.
Understanding Elasticities
Price Elasticity of Demand
- Elastic demand: The quantity demanded (qd) is sensitive to price changes.
- Inelastic demand: The quantity demanded (qd) is insensitive to price changes.
Applications of Demand Elasticity
Elasticity serves the consumer and the producer in two main ways:
- Consumer Valuation: A higher valuation makes the demand more inelastic, while a lower valuation makes it more elastic.
- Sales Revenue: It helps determine the effect on sales revenue (consumer spending) caused by changes in price, calculated as Vv = P x Q.
Revenue Effects on Demand
- Elastic demand: If the price is lowered, the quantity rises proportionately more than the decrease in price. Therefore, the sales revenue increases because the proportion of the quantity increase is higher than the price decrease.
- Inelastic demand: If the price is lowered, the quantity demanded increases proportionately less than the fall in price. Thus, sales revenue falls because the price decrease outweighs the increase in quantity.
Price Elasticity of Supply
- Inelastic supply: The price changes, but the quantity supplied changes very little.
- Elastic supply (Oferta Elástica): The price changes slightly, and the quantity supplied changes significantly.
Causes of Supply Elasticity
The elasticity of supply depends largely on the time term: a shorter-term supply tends to be inelastic, while a longer-term supply tends to be elastic. Similar to demand, Elastic supply sees net revenue rise, while inelastic supply sees net revenue fall.