Supply and demand is one of the key concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or service is required by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The connection between price and how much of a good or service is supplied to the market is known as the supply relationship. Therefore, the price is a reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the distribution of resources. In market economy theories, demand and supply theory will distribute resources in the most efficient way.
One of the elements that affect demand is expectation of price that will be in the future. If buyers have expected the price will increase, they would have purchase more before it raises the price. Thus, the demand for sugar will increase. It wouldn't have any effects on household because a family will not consume as much sugar as someone who is doing business which related to sugar. For those who own business like bakery shop, coffee shop, and dessert shop are forced to pay a higher price for sugar. Whereas for the law of supply, it simply means that the suppliers are willing to produce more products at a higher price compare to a lower price. When the price is increasing and the quantity of demand is decreasing, there will be more suppliers and the quantity supplied will be higher. The suppliers try to produce more in that period so that they can increase the profits that they earned. For example, when the price of sugar is increasing, the quantity of supply will be increased while the quantity of demand will be decreased.
The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price. There are three types of elastic demands which are perfectly inelastic demand, unit elastic demand and inelastic demand. In this situation it is the inelastic demand. Basically, inelastic is a situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price. From the supplier's viewpoint, this is a highly desirable situation because price and total revenue are directly related; an increase in price increases total revenue despite a fall in the quantity demanded. For example, the changes of price of sugar are inelastic to consumers because most of them only spend a very small amount of income, almost zero elastic demand.
So how can sugar be placed in inelastic demand? The answer is the complementary goods. For example, if the price of sugar rises, the demand for bubble tea will be decreased. It is because bubble tea is not a daily need in life for human being. Therefore, the demand curve for bubble tea shifts to the left. Besides that, there are some other causes that are affecting elasticity such as the density of substitutes and the amount of income spent on sugar. Firstly, it is the density of substitutes. Sugar is a good that is necessary for daily needs in life and it has weak substitutes so it can be consider as inelastic demand. Secondly, it is the amount of income spent on sugar. A household spends a little amount of money on sugar every month. This is why sugar is placed in inelastic demand.
When the price of sugar is higher, the quantity of supply will be higher because supplier can earn more profit while the quantity of demand is low. This will cause a surplus in the graph. A surplus is being more than or in excess of what is needed or required. On a supply and demand curve a surplus is represented by points above the equilibrium price. When a surplus exists buyers have an oversupply of product to choose from and will probably pay less for goods and services. For sellers, they are competing with other supplier for customers and their prices will fall, as will their sales.
Last but not least, I think that government is using the concept of price ceiling to control the market of sugar. There are few reasons that the government uses price ceiling in the sugar market. Firstly is to avoid black market is an illegal business of buying or selling goods or currency in violation of restrictions such as price controls or rationing. For example, some suppliers might be selling the sugar with the price that higher than the government set to them.
Yeo Ee Ling
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