Microeconomics is a field in economics that studies the individual behavior of modern households and firms and how they make decisions to allocate resources (Arnold 303). Microeconomics seeks to examine how decisions made and behavior patterns affect demand and supply of goods and services.
Supply and demand concept
Demand and supply are the fundamental concepts of microeconomics this is because firms determine what, how and how much to produce, while households decide what and how much to consume. Allocation of economic activities is dependent on supply and demand to meet market equilibrium which is the point where demand and supply meet (Colander 13).
Demand is defined as the willingness of the customer to buy a product at a particular price and the law of demand states that the higher the price, the lower the demand and the lower the price, the higher the demand (Arnold 303). Demand is an economic phenomenon that states demand reflects what households are willing and able to pay for and it is ready to buy different amounts of good at different prices (Samuelson and Nordhaus 13).
There are two types of goods; the normal goods that obey the law of demand that states the higher the price the lower the demand and the lower the price the higher the demand. Secondly, is the giffen goods, and these are goods that do not obey the law of demand and whose demand curve flows on the opposite direction. The demand for giffen goods is higher when the price is higher and lower when the price of the good is lowered.
Quantity demanded is defined as the amount of a good that will be bought in the market at a given price. The law of quantity demanded states that, if the price of a product rises then the quantity demanded falls and if the price of a product falls then quantity demanded rises (Baumol and Blinder 100; Colander 13).
Supply on the other hand, is the cumulative willingness of all firms to produce various amounts of products at various prices. The law of supply states that the higher the price the higher the supply and the lower the price, the lower the supply.
Firms produce goods depending on the market price they can get for the goods they produce (Colander 14). The firms produce and supply different products at different market prices. Market supply is defined as the aggregate quantity of a good that all the firms that produce it will make available at all possible prices.
The supply curve is always straight, and slopes upward from left to right, representing the law of supply. Quantity supplied is defined as the amount of good that firms will be willing to sell in the market at a given price. The law of quantity supplied states that if the price of the market falls then quantity supplied will fall and if the price of the market rises, then the quantity supplied will rise (Baumol and Blinder 101).
The market equilibrium is defined as the point where the demand curve and supply curve meet to at the one and only price at which quantity supplied and quantity demanded are equal.
At equilibrium there are no market forces operating to influence quantity and price, and it is represented in graph form by the two curves intersecting. Supply and demand is an economic factor that influences the price determination of a market. The two in a competitive market will settle where the quantity demanded by customers and the quantity supplied by producers meet at the center, which determines the price and quality.
If the demand increases and supply remains unchanged, it leads to higher price and quantity and if demand decreases and supply remains unchanged then it leads to lower price and quality (Arnold 306). If the supply decreases and demand remains unchanged it attracts a higher price and lower quality, and lastly if supply increases and demand remains unchanged it leads to lower prices and higher quantity.
The shift in equilibrium is caused by factors that affect the quantity supplied and quantity demanded (Baumol and Blinder 105). Some of the factors that influence the quantity supplied include production costs, technology used in production, price of related goods, number of suppliers and firm’s expectation about future prices.
On the other hand, the factors that influence demand include income, taste and preference, price of related goods and services, consumer expectations of future price and income, and lastly the number of potential customers (Colander 13).
The concept of demand and supply faces the great economic problem of scarcity of resources in the aim of meeting desired ends. Supply and demand tries to solve the problem of shortage and surplus through raising or reducing the resources, as they are required (Baumol and Blinder 108).
To address shortage and surplus economic challenges Colander (13) notes, the supply and demand concept needs to address factors of what goods and services should one produce and in different quantity. Secondly, the type and quantity of produce to deal with, that is the choice of production (14). Thirdly, who to produce for, where it is determined who gets how much to produce. Other factors to rise include utilization of resources, production efficiency and growing produce capacity and lastly the purchasing power of the consumers (15).
Application of supply and demand concept
The U.S department of agriculture stated the soaring growth of demand of organic products by giving the rising sales statistics of organic products (Faber 3). In terms of cash, the demand had grown from 3billion in 1997 to 10billion in 2003. The sales of organic food had grown by 20% annually and there was a forecast by experts that the industry share of the U.S food market was expected to grow from 2% to 3.5% (Faber 4).
This according to Faber (4) indicated that the demand was growing so fast outstripping the quantity supplied, forcing the U.S food department to spend more than 1billion a year to import organic food and the ratio between import and export was 8:1.
Most of these imports came from the European Union and specifically from farmers who had weaker organic standards in about 12.6million acres. The cost of importing the organic products was very costly on the U.S food department and it started encouraging American farmers to start producing organic products (6).
This meant farmers in the U.S would stop using synthetic fertilizer and start applying natural fertilizer only. Before the farmers could start selling under the label of ‘organic’ it would take them three years to ensure the farms are free from non-organic fertilizers. The practice of growth hormones and antibiotics was also to be abandoned.
The government encouraged farmers to make the transition and though it would lower the yield in the long run, it was a cheap method of production, and yield was bound to double once the farm was fully organic. Organic food prices in the U.S is a little costly than the non-organic foods, this is because the supply of organic is limited and the quantity demanded is high (Faber 6). The demand and supply concept applies in this situation because of the economic problem of organic food shortage.
The farmers, who are the organic food supplier, strive to increase quantity supplied in the market, because the price the consumer is willing to pay is high (Arnold 310). The law of quantity supplied states the supplier will supply more if the market price is high and vise verse.
During importation, there is market disequilibrium because the quantity and price do not seem to meet to determine a balance. To complete the balance the U.S government encourages farmers in the U.S to make a transition to produce organic products. The U.S department tries to bring harmony between price and quantity by motivating farmers and offering assistance to organic farmers (Faber 8).
The U.S set standards to the organic food grown by its farmers and maintains the organic standards to keep supplying the product to the consumer in demand. The highly competitive market is significant in pricing of the organic products; this is because the European Union has a huge market advantage and has a pricing advantage (Arnold 311). Since the Americans spend less in transportation and costs of farming organic products is reduced, then the farmers will have a competitive advantage over the European Union.
The supply and demand concept in a liberalized market freely flows until the market equilibrium is achieved. Price or quantity advantage does cause a disequilibrium causing shortages or surplus. This can be solved through increasing quantity supplied by increasing the price of the market level, or reducing quantity supplied by reducing the price of the market level. With the help of microeconomics, the market can be studied and stabilized accordingly.
Arnold, Roger. Microeconomics. New York, Cengage learning. 2010. P303-312
Baumol, William. J and Blinder, Alan. S. Microeconomics: principle and practice. Mason: Cengage learning.2009. P.100-112
Colander, David. Microeconomics. London: McGraw-Hill paperback. 2008. P.13-24
Faber, Scott. “Demand for organic food growing faster than domestic supply”. Bay journal 4.1(2006): 3-11.washington D. C, Chesapeake. 3 November, 2011
Samuelson, Paul. A and Nordhaus, William. A. Economics (19th edition), New York, Mc Graw Hill.1992. P.3-106