Supply and Demand Simulation

Posted: October 17th, 2013

 

 

 

 

 

 

 

Supply and Demand Simulation

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Supply and Demand Simulation

According to Adams (2002), microeconomics is the interaction and behavior of individual units in an economy. On the other hand, however, he says that macroeconomics looks at the economy as an aggregate. While microeconomics has a narrow view of the economy, macroeconomics looks at the economy from a broad perspective. In the simulation, for example, Atlantis city is a small and friendly city with adequate infrastructure, which makes it suitable to habit. This can be viewed as the macroeconomic viewpoint of the city since the analysis covers a broad spectrum. The simulation further indicates that there is a low traffic and very little pollution and low crime rate. This establishes a more narrow perspective of the city, looking at individual components of the city that makes it conducive living environment. Adequate infrastructure is also a generalized concept making it a macro economic viewpoint of the city. The mention of the parks and housing narrows down the field into two different sublets of infrastructure, that is, housing and recreational facilities (microeconomic concepts).

A shift in the demand and supply curve can move to the right or to the left depending on different market forces. A shift to the right of the supply curve would indicate that there has been a subsequent increase in the supply of two-bedroom apartments. There was a shift in the demand curve to the right. This was due to an increase in demand affected by the fact that a new company, Lintech, moved to the city, and there was therefore a population increase and a subsequent increase in demand of two-bedroom apartments. The entry of new population had an in income, which made them prefer detached houses. Demand for two-bedroom apartments went down resulting to a shift in to the left in the demand curve. Goodlife went further and converted 400 apartments out of their 3200 into condominiums. This resulted in a shift in the supply curve to the left.

Equilibrium is the point at which the demand and supply curve meet in the middle. This is the point at which the supply of goods and services is directly proportionate to the demand of the same goods and services. In this simulation, it would be the point at which the supply of apartments meets the market demand at a price set by the forces of demand and supply. The equilibrium price was initially at 1050 dollars, and the quantity supplied was 2000 apartment units. A shift to the right in the demand curve, occasioned by an increase in population from Lintech, increases the price of the units supply remaining constant. In terms of decision-making, it will be prudent for the supplier to increase the supply.

However, change in the preferences of the consumers occasioned by an increase in income levels meant demand would decrease. The conversion of apartments into condominiums decreased the supply of the apartments. A decrease in demand of the two-bedroom apartments due to change in preferences lead to a decrease in supply, and therefore, the demand and the supply curves would shift to the left. What happens to the equilibrium rental rate and quantity will depend on which of the two effects is stronger. The shift in supply were more than the shift in demand, for example, it would mean that there would be a shortage at the equilibrium rental rate meaning that supply will be lower than what is demanded. Meaning, the company will have to offer fewer apartment units than the potential customer is willing to spend on them. The rental rate would have to go up so that the quantity demanded reduces until there is a reduction in shortage. This process goes on until a new equilibrium point is reached.

The forces of demand and supply are extremely important in the business world. These forces are subject to various factors on the side of both the consumer and supplier. For example, an increase in demand will be subject to not only price, but also taste and preferences, the income level of the consumer market and even the size of the market. Increase of supply is also affected by various other factors such as price of related goods, size of population among others. In the phone industry, for example, the demand is mainly geared by pricing, but other factors must be put into play. Why would one consider buying an iPhone when it is deemed very expensive? It is simply because the Apple phone company has curved out a niche in providing excellent quality phones that are easy to use. It is therefore crucial to consider the market trends to ensure one’s products are always relevant. It is important to consider all these in one’s entrepreneurial ventures.

Microeconomics, as aforementioned, deals and interacts with the individual units of the economy. In the real estate business, microeconomics will look at the various living conditions of different parts of the city and determine who lives there. Microeconomics may analyze the individual aspects that may affect an industry, for example, increase in earnings, population patterns and customer preferences in real estate. An affluent area will have fewer accommodation units directly proportionate to the few who earn high salaries, and less affluent areas will have more people due to the highly affordable housing units. Macroeconomics, on the other hand, would look at the economy from a broader perspective; it determines demand and supply in the whole city of Atlantis having the issues discussed in microeconomics under one umbrella. Equilibrium in essence would be a culmination of price and quantity determined at the micro level.

Price elasticity of demand simply refers to customer’s responsiveness or sensitivity to changes in price (Ferrell & Hartline, 2008). In the simulation, an increase in price led to a decrease in the demand of apartments. The simulation recommended that the price should be optimized to achieve maximum profits, while at the same time ensuring that the pricing would still be favorable to the customer. This is the point of equilibrium. Prices above this point would lead to surplus and prices below would lead to a shortage. The simulation has been effective in determining the effectiveness of the forces of demand and supply.

References

Adams, F. G. (2002). Macroeconomics for business and society: A developed/developing country perspective on the “new economy”. New Jersey: World Scientific.

Ferrell, O. C., & Hartline, M. D. (2008). Marketing strategy. Mason, OH: Thomson/South-Western.

 

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