Demand and Elasticity Concepts and Their Application

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The Demand Concept

Demand is a common economic subject and principle that refers to the desire, willingness, and ability to purchase and pay the price for a specific good or/and service. In most cases, the demand for goods and services decreases as the price increases. Similarly, when the price decreases, the demand increases. This economic principle applies to assume all other factors apart from price are invariable or held constant. Market demand refers to the total quantity demand of a given good in a market across all consumers (Fukase & Martin, 2020). On the other hand, aggregate demand is the cumulative demand for all services and goods in a particular economy.

Application of Demand in a Car Industry

Toyota Company and Ford are in high competition to win the United States of America car market. The two companies spend substantial resources identifying and determining the demand for specific brands in the U.S. It is also upon the giant companies to establish the number of units they are likely to sell, given the prevailing prices and economic conditions (Fukase & Martin, 2020). This is critical because incorrect estimation results in losses when overestimated, or customers money is left unspent in case of underestimation. Customers demand fuels the economy, and its absence implies little or no production.

For instance, though the largest market for Ford in the United States with 1.8 million vehicles in wholesale dealerships in 2020, Toyota overtook it by delivering a whopping 1.9 million units to customers in the year 2021 despite the ravaging COVID-19 pandemic that adversely affected many markets across the world (Shigeta & Hosseini, 2021). The change in the units sold by the automotive dealers implies a shift in demand and probably in price.

Relationship between Demand and Supply Components

Demand and supply are closely related, and their interactions determine the equilibrium price and quantity. The equilibrium point is where the demand curve of a specific good or service meets or crosses the supply curve (Islam et al., 2021). The point of intersection between the two curves gives the equilibrium quantity and price. The equilibrium point is important because consumers want to pay the lowest price possible for the goods and services they demand. In contrast, suppliers want to charge the maximum potential to maximize their profits. Charging consumers too little increases demand, but the price may not cover the suppliers cost and give room for profit. Likewise, if the supplier charges too much, the demanded quantity declines, and thus the seller makes little sales to earn enough profit. Therefore, the only alternative is to balance the demand and supply.

Factors that Determine Demand

Taste and preferences of the consumer, in this case, it is important to realize that individuals taste for goods varies depending on the manufacturer, ingredients, color, and many other variables. When the taste and preference of a particular good or service are more significant than others, its demand tends to increase and the demand curve shifts upwards. For example, COVID-19 has been associated with non-communicable diseases (NCDs) like high blood pressure, diabetes, heart diseases, and upper respiratory illnesses. Since NCDs are associated with obesity, overweight, and lack of exercise, many Americans turn to high-calorie foods such as bread, red meat, soy products, avocados, dairy foods, chickpeas, sweet potatoes, whole grains (brown rice), and nuts (macadamia). Therefore, the demand for the above foods has gone down due to the taste and preference of many citizens.

Incomes of the people- in this case, the lower the peoples level of income, the greater the demand for products. An implication that arises in income leads to an increase in demand and an upward shift of the demand curve and vice versa is true. A rise in income constantly enhances the purchasing power of consumers. Hence, income determines the affordability of goods and services. These rationales make an increase or decline in income positively or negatively affect the goods or services income. In towns like New York and Washington, most residents are middle- to high-income.

The demands for banking services in these towns are higher than in Las Vegas and Fresno, California. Society composition and wealth determine demand levels. Changes in the prices of the related goods- demand for certain goods is affected by the prices of other related goods. Goods that change in demand due to the prices of others are related by either being complements or substitutes. For example, butter, peanut, and jam are mostly purchased together with bread. Therefore, butter, peanut, and jam are complementary goods to bread. An increase in the price of bread leads to low demand for the good and consequently reduced demand for butter, peanut, and jam. On the other hand, when prices for a loaf of bread go down, the demand increases, leading to high demand for its complementary goods.

On the contrary, products or services used alternatively but to serve a similar purpose are called substitute goods or services. Substitute goods include margarine and butter, tea and coffee, Coke and Pepsi, and Colgate and Crest. When the price of a substitute good increases, its demand decreases while the demand of the substitute good increases, assuming that its price is constant. For instance, if the price of a 500 ml Coke increases, its demand declines while the demand for Pepsi shoots and vice versa.

The populations of consumers in the target market- present and prospective buyers or consumers determine the market demand at every given price. As the number of buyers of a particular commodity increase, its market demand goes up and vice versa. When a supplier puts effort into finding a new market or expanding the existing clientele for their services, the demand for that particular service increases. Another significant factor in increasing the number of consumers is the growing population. The population contributes to economic growth through increased demand and supply of skills and expertise.

Change in the propensity to consume- market players propensity to consume and save affects demand positively and adversely, respectively. When the propensity to consume rises, consumers spend a considerable proportion of their income to buy a particular good or service, expecting its demand to increase. On the contrary, if consumption propensity falls, the consumers spend their income sparingly, saving more, expecting that the demand will fall. Expectations of consumers concerning future prices- if, for specific reasons, consumers speculate that prices for particularly good or service will fall, they tend to purchase low quantities of that good or service in the present so that they pay less in the future when demand is low. On the other hand, when buyers expect, due to unavoidable circumstances, the prices of a commodity to rise, they tend to buy greater quantities of the good in the present when the price is low so that they dont pay higher prices for that particular good.

Income distribution- equal distribution of income leads to a relatively high propensity of the society to consume and, consequently, high demand for goods and services. With an unequal income distribution, consumers propensity to consume is relatively low. Thus, demand decreases. The factor is further explained by the low propensity to consume the rich compared to the poor. For example, western countries like the U.S.A, Japan, Germany, The U.K., and others have close to even distribution. After discovering Covid-19 vaccines such as Johnson and Johnson, Moderna, AstraZeneca, and Pfizer, the uptake of Covid19 vaccination has hit over 80% in most countries, implying greater demand. On the other hand, in African countries and some Asian nations, the income distribution is unequal, and thus, the demand is low.

Demand Elasticity

The elasticity of demand is the responsiveness of a goods demand compared to other economic factors changes or adjustments (Keat & Young, 2014). Price is a common economic factor varied to determine demand elasticity, but income can also be used.

Types of Elasticity of Demand

There are three common types of demand elasticity: price elasticity of demand, cross-price elasticity, and income elasticity of demand. Price elasticity of demand- this kind of elasticity determines the effect of price change on the quantity demanded. It is generally calculated as the percentage change in demanded quantity over the percentage change in the products price. Due to the law of demand, elasticity commonly results in a negative elasticity unless the good is given.

When the quantity demanded of a good does not respond to the price changes, the commodity is said to have a perfectly inelastic demand. On the other hand, if the percentage change in price is equivalent to the percentage change in quantity demanded, then the demand of that good is said to be unit elastic (Díaz and Medlock, 2021). Examples of goods whose demand is price elastic include cars, furniture, and housing. Besides, goods whose demand is inelastic are beef, salt, prescription drugs, textbooks, and gasoline. Factors affecting price elasticity of demand are:

Nature of the good; is it a luxury or a necessity.
Availability or affordability of close substitutes.
Time elapsed since the price changed.
Income proportion spent on the good.

The cross-price elasticity of demand measures the sensitivity of demand of one good compared to the change in the price of another commodity. When the Cross-price elasticity of demand between two commodities is negative, then the goods are a compliment, and when the elasticity is positive, the goods are substitutes (Yadav et al., 2021). For example, if the price of margarine rises, the demand for butter rises, inferring to substitute goods. When the price of bread rises, the demand for butter falls because the goods are complementary.

Income elasticity of demand this elasticity refers to the responsiveness of the quantity demanded of a particular good about change in the consumers income (Fernandez, 2018). Income elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in the consumers income. Whenever the income elasticity of demand is positive, the commodity is considered good; denoting quantity demanded increases as income increases and vice versa. On the other hand, if the income elasticity of demand is negative, the commodity is considered inferior good; this implies that the quantity demanded decreases as the income increases. Inferior goods are associated with the poor.

Application of Elasticity Regarding the current Trend of the Covid-19 Pandemic and Waves

The cost of testing for Covid-19 in 2020 in the United States of America was relatively high, ranging from $52 to $478 per individual. In 2021, Covid-19 testing dropped to as low as $10 and was free in government health facilities, mainly when one exhibits symptoms associated with the disease (Keat & Young, 2014). The number of people who have undergone testing in 2021 tripled for every monthly total. It is related to a reduction in price for the service. Therefore, the price elasticity of demand for Covid-19 testing was negative and low prices resulted in increased demand.

The prices of Moderna and Pfizer have significantly increased due to their readiness to combat different Covid-19 variants. However, with the same capacity to fight emerging variants, AstraZeneca is cheaper, and its price has remained steady over time. As a result of cross-price elasticity, many countries, especially the low and middle-income countries, are going for AstraZeneca vaccines for their population. On the same breadth, many economies worldwide are recovering and thus increasing their income; for this reason, their governments are buying large quantities of vaccines to protect their population from the adverse effects of Covid-19.

References

Díaz, A. O., & Medlock, K. B. (2021). Price elasticity of demand for fuels by income level in Mexican households. Energy Policy, 151, 112132.

Fernandez, V. (2018). Price and income elasticity of demand for mineral commodities. Resources Policy, 59, 160-183.

Fukase, E., & Martin, W. (2020). Economic growth, convergence, and world food demand and supply. World Development, 132, 104954.

Keat, P., & Young, P. (2014). Managerial economics. Boston, MA: Pearson. ISBN: 978-0133020267

Shigeta, N., & Hosseini, S. E. (2021). Sustainable development of the automobile industry in the united states, Europe, and Japan focuses on the vehicles power sources. Energies, 14(1), 78.

Yadav, D., Kumari, R., Kumar, N., & Sarkar, B. (2021). Reduction of waste and carbon emission through the selection of items with cross-price elasticity of demand to form a sustainable supply chain with preservation technology. Journal of Cleaner Production, 297, 126298.

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