Following the currently experienced high rate of globalization in many regions across the world, the study of micro-economic models/theories has found its significance and relevance in various real-life situations. Considering various theories like the price theory and the law of demand among others, it has become very important for individuals and households to be acquainted with various microeconomic models. For instance, the price theory suggests that the price of any commodity a consumer wishes to acquire the commodity at represents the ultimate value of satisfaction acquired from the utilization of the commodity.
More precisely, the price a consumer wishes to pay for a commodity represents the satisfaction value of acquiring such a commodity. On the other hand, the law of demand suggests that a consumer would be willing to buy more of a commodity if its price is low than when the price is high. Basically, the law of demand is embedded in the ultimate will of the consumer to purchase a commodity, under the influence of its price. This means that consumers usually are very sensitive to the level of satisfaction from consuming a certain commodity or service, in relation to the price tag against the commodity or service.
It is important to note that, the microeconomic models/theories assume the rationality of the consumer. In this respect, the level of satisfaction a consumer derives from consuming a commodity is referred to as utility. In this case, the consumer places the value of the commodity to the value of money he/she wishes to depart with to get the commodity or service wanted. In this respect, therefore, if the value of the commodity is equal to the value of the commodity according to the consumer’s judgment, he/she would buy the commodity. If the value of the commodity is lower than its tagged price, then a rational consumer may not buy the commodity.
Any changes in demand of a commodity may be attributed to various factors which in a way influence it like population changes, price changes and change of tastes and preferences among others. More specifically, there are various factors that have been associated with the changes in the demand of a commodity from one time to another. It is of great importance to note that, the factors that contribute to the changes of demand either interplay in a way or are independent. In this respect, therefore, consumers would always buy commodities in large amounts when their prices are lower than when the prices are high.
Another principle in microeconomics is price elasticity. Price elasticity refers to the responsiveness of a price level to change with the changes in the quantity demanded or supplied. The price elasticity of demand of a commodity can change as a result of various factors. In this case, the factors that have been revealed to affect the price elasticity of demand of a product include the price of other related commodities, future expectations, change in tastes and preferences among others. More specifically, the price elasticity of a product may change due to changes in the product’s substitutes and complements, expected changes in the prices of the commodity in the near future and changes in the tastes and preferences of the product.
It has been observed that, if demand decreased proportionally to an increase in supply along an elastic and inelastic curve, demand and supply analysis can be used to compare the impact on price, quantity and total revenue. In the diagram below, the impact of a shift in demand along an elastic supply curve is demonstrated. As it can be observed, the supply is perfectly elastic and the shifts in the demand level can be highly influenced by the changes in price, income level and the quantity supplied.
On the other hand, where supply is perfectly inelastic, the shifts in demand seem to be not affected by the quantity supplied since the changes in price and income do not impact the quantity supplied. This can be clearly seen in the graph below where the changes in prices and income levels do not impact the quantity supplied.
As it can be seen the shifts in the supply curve are not caused by the changes in supply as the level of supply is constant and not affected by the changes in prices and income levels. Considering the table below, (which represents the supply of houses within the Melbourne area) a demand curve against the supply curve for the situation can be illustrated.
|Prices of Houses ($ @unit)||100||120||150||180|
|No, of Houses Supplied||1000||1500||2000||2500|
|No. of houses Demanded||2500||2000||2000||1800|
Generally, the high demand for houses in the areas of Arizona has been triggered by their low supply which consequently resulted in the hiking of their prices. Further, it has to be noted that, the forces of demand and supply would interplay until at a certain price level, the quantity demanded would be equal to the quantity supplied. From the above graph, it can be observed that the equilibrium price for houses in the Melbourne area is $150. This is reflected by the equal number of houses demanded and the houses supplied.
As it has been observed, any changes in the price of a commodity affect its supply and demand greatly. On this basis, therefore, the quantities of a commodity either demanded or supplied are entirely dependent on its prices. This is because consumers usually tend to value the utility acquired from a certain commodity or a service with regard to its price.