Demand and Supply Models
Order Instructions:
if the markets price is kept below the equilibrium price by a regulation what does the demand and supply model predicts about the gap between quality demanded and quantity supplied? if in the real world there is a gap between quality supplied does it necessarily imply that a regulation is keeping the market price below the equilibrium price.
SAMPLE ANSWER
Demand and Supply Models
Market price is among the factors that affect the demand and supply of goods in a business environment. Usually, low market price would mean that more consumers are able to purchase a product and therefore, the demand of the product would be relatively high. With time however, changes may be noted in the relationship as demand would eventually decrease as more consumers get the product. Supply of the product may be inadequate with the increased demand. Therefore, a situation would arise where the demands starts at a high figure but decreases, and supply on the other hand would start at a low figure and increase with time.
Lee noted that demand is increased with reduced prices (Lee, 2015, Pg. 5). The gap between quantity demanded and quantity supplied would progressively decrease so as to approach a state of equilibrium. The opposite would happen with high market price. With reduced market price, the market would abruptly increase but upon reaching a certain threshold, it would be maintained constant and with time it would start decreasing. Demand and supply would always tend toward equilibrium. When either of them is increased, the other would be decreased and vice versa. In this case, low market prices increase the demand but lower the supply of the commodity. Therefore the two would take opposite trends as they approach each other.
In most situations, the rate at which supply of a commodity is reduced is the inverse of the rate at which demand is increased. It should be noted that tendency to withhold the market price by a regulation would eventually hurt supply. Such a regulation is necessitated by a situation of too high demand while supply is still at normal levels. In such a case, consumers need a commodity and the commodity is available at the market but most likely, the price is too high and does not confer with supply and demand.
Reference
Lee, D. (2015). Demand and Supply. Retrieved May 11, 2015 from http://www.econlib.org/library/Topics/College/supplyanddemand.html
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