Supply and Demand Simulation

Posted: October 17th, 2013

Supply and Demand Simulation

Name:

Course:

Instructor:

Institution:

Date:

Supply and Demand Simulation

Question 1

            The microeconomic concepts from the simulation are the change in preferences that change the demand of the two bedroom apartments. The change in preference from the two bedroom apartments reduces the demand but not the supply. Another micro economic concept is the impact of increased population on the demand for the rented apartments. Increased population increases demand for the apartments with the supply remaining constant. These concepts are microeconomic since microeconomics depends on demand and supply of the individual consumers or companies. The population and the customers’ preference concepts relate to the microeconomic concepts. On the other hand, the macroeconomic concepts are the rental rates below the equilibrium price that leads to higher demand and the rental rates above the equilibrium price that leads to lower demand. These are microeconomic concepts since they affect the cumulative demand and supply of the apartments. Its effect is not caused by the consumers’ individual choices as in microeconomics (Ball & Seidman, 2012).

Question 2

            A shift in the demand curve is caused by the change in preference towards the purchase of the detached homes. This causes a negative shift in the demand curve since the demand of the two bedroom apartments reduces with the supply remaining constant. Customers change their preference from the two bed roomed houses to the detached homes making the demand of the detached homes to reduce. Offering some of the two bed roomed apartments to rent to the condominiums for sale reduces the supply causing a negative shift in the supply curve. Since some of the rental houses that were offered to the consumers are now offered to the condominium buyers, the supply of these houses to the consumers will reduce causing a negative shift in the supply curve.

Question 3

            The shift in the demand curve causes the equilibrium price to reduce. In addition, the equilibrium quantity also reduces since the quantity demanded has reduced. This situation makes the quantity demanded to be less than the quantity supplied. In this case, the tenant offers more houses than the customers are willing to pay. This reduces the price. In decision-making, the tenant has to reduce the rental rate in order to reduce the supplied quantity. In addition, the quantity supplied also decreases. This causes a reduction in the surplus houses offered. Finally, the supplied quantity will decrease increasing demand. On the other hand, the negative shift in the supply curve causes an increase in the equilibrium price and a decrease in equilibrium quantity supplied. This leads to scarcity of the houses. In decision-making, the more houses will have to be offered to the consumers to solve the scarcity problem (Ball & Seidman, 2012).

Question 4

            From what I have learned about supply and demand, I may apply this concept in the sale of a product with close substitutes such as Pepsi and Coca-Cola. In case the price of Pepsi rises, customers will shift to Coca-Cola reducing the demand for Pepsi. On the other hand, the demand for Coca-Cola will increase and so will the supply. For the demand for Pepsi to increase, the price will have to be reduced as that of the Coca-Cola or even lower than that of Coca-Cola. This will increase its demand and supply in the market.

Question 5

Microeconomic concepts enable the understanding of the factors affecting shifts in supply and demand on the equilibrium price and quantity. In microeconomics, these factors are the individual consumers and firms. Microeconomics is focused on the supply and demand of individual goods and services. Demand depends on factors such as product’s price, consumer’s income and preference. On the other hand, supply depends on the production cost, price of related goods, and price of the good. Equilibrium is reached when the quantity demanded is the same as the quantity supplied.

Question 6

The macroeconomic concepts also enable an understanding of the factors affecting the shifts in supply and demand on the equilibrium price and quantity. In macroeconomics, these factors affect the general economy and not the individual firms as in microeconomics. The aggregate demand and supply of all the goods in the economy is affected. The macroeconomic factors affecting demand are the interest rates, taxes and tariffs, exchange rates and the income. The factors affecting supply are the cost of production, economic growth, the producers’ anticipation of future profits and the public policy. In macroeconomics, equilibrium occurs when the aggregate demand equals the aggregate supply (Ball & Seidman, 2012).

Question 7

            Price elasticity of demand is the balanced change in demand given the change in price. In most cases, the price elasticity is usually 0.5 for the consumer goods and services. The best price elasticity of demand is usually the elastic price elasticity. This is usually greater than negative one. The one less than negative one is known as the inelastic. The essential goods that usually have few substitutes have a low elasticity of demand. Therefore, the firms price them at lower costs and the consumers always have to purchase them since they are essential. The non-essential goods with many substitutes have a high elasticity of demand. They are usually priced expensively. The consumers turn to the close substitutes priced cheaply. Luxurious goods have an elastic demand. They are always priced expensively by the firms (Ball & Seidman, 2012).

References

Ball, M. K., & Seidman, D. (2012). Supply and demand. New York: Rosen Pub.