Influence Of Supply On Demand And Price In A Previous Module

Influence Of Supply On Demand And Pricein A Previous Module The Topic

Influence of Supply on Demand and Price In a previous module, the topics of demand behavior and supply behavior were explored in isolation. We now explore demand and supply interactions. The setting in which this interaction occurs is called a market. The term “market” denotes the web of interactions between those who have commercial relationships, or the potential to have such relationships, with other buyers and sellers of similar commodities. Using your textbook, University online library resources, and the Internet, research supplier-induced demand. Write a paper explaining: How price is set in a competitive market The conditions that have to be met for market equilibrium to be established Write a 2- to 3-page paper in Word format. Apply current APA standards for writing style. All written assignments and responses should follow APA rules for attributing sources.

Paper For Above instruction

Introduction

Understanding the dynamics of supply and demand is fundamental to comprehending how market economies operate. The interaction between these two forces determines the price and quantity of goods and services exchanged in a competitive market. In this paper, we will explore the mechanisms through which prices are set in such markets and identify the conditions necessary for establishing market equilibrium, with a particular emphasis on the concept of supplier-induced demand.

How Price Is Set in a Competitive Market

In a perfectly competitive market, numerous buyers and sellers participate, none of whom have the power to influence prices individually. Price determination primarily occurs through the interaction of supply and demand curves. The demand curve shows the relationship between the price of a good and the quantity consumers are willing and able to purchase at each price point. Conversely, the supply curve illustrates the relationship between the price and the quantity producers are willing to sell.

The equilibrium price is established at the point where the quantity demanded by consumers equals the quantity supplied by producers, known as the market clearing point. This intersection ensures that there is no surplus or shortage in the market. If the price is above equilibrium, suppliers will produce more than consumers are willing to buy, leading to a surplus. Conversely, if the price falls below equilibrium, demand will outstrip supply, resulting in a shortage. Market forces naturally push prices toward equilibrium, as suppliers adjust their output, and consumers modify their purchasing behavior accordingly.

Several factors influence this price-setting process, including production costs, consumer preferences, technological advances, and external shocks. Additionally, the presence of information symmetry—where buyers and sellers have equal access to relevant information—maintains the competitive nature of the market, preventing monopolistic pricing.

Conditions for Market Equilibrium

Market equilibrium occurs when the quantity of goods supplied equals the quantity demanded at a given price level. Several conditions must be fulfilled to establish and maintain this equilibrium:

1. Homogeneity of Products: The products offered by different suppliers must be similar enough that consumers view them as perfect substitutes, simplifying the price-setting process.

2. Free Entry and Exit: Firms should be able to enter or leave the market without substantial barriers, ensuring that supply can respond to changes in demand and vice versa.

3. Perfect Information: Both consumers and producers must have comprehensive knowledge of prices, product quality, and other relevant factors. This ensures resource allocation aligns with consumer preferences and cost conditions.

4. Large Number of Buyers and Sellers: The market must consist of numerous participants, behaviors of individual agents not significantly influencing overall prices, ensuring competitive equilibrium.

5. Mobility of Resources: Factors of production should be easily adjustable, allowing supply to respond quickly to shifts in demand.

6. Absence of Externalities: The market should function without external effects, externalities, which can distort prices and quantities away from socially optimal levels.

When these conditions are satisfied, supply and demand interact seamlessly, and the market naturally tends toward equilibrium. However, market imperfections or external interventions can prevent equilibrium from being achieved or maintained, leading to persistent surpluses or shortages.

Supplier-Induced Demand

A vital aspect of understanding supply and demand interactions is the concept of supplier-induced demand (SID). This phenomenon occurs when suppliers influence the level of demand for their products or services beyond what would be expected under free market conditions. It is particularly relevant in health care, real estate, and financial markets, where information asymmetry often exists.

In the context of supplier-induced demand, providers may promote or create demand to increase sales or revenue, sometimes leveraging their informational advantage over consumers. For instance, physicians might recommend tests or treatments that are not strictly necessary, influenced by financial incentives or practice norms. This behavior can distort market equilibrium by increasing demand artificially, which can elevate prices and lead to inefficiencies.

Understanding SID is critical because it reveals imperfections in the idealized competitive market scenario. It indicates the need for regulatory oversight, transparent information dissemination, and ethical considerations to ensure that demand remains aligned with genuine consumer preferences and needs.

Conclusion

Price determination in a competitive market hinges on the interplay between demand and supply, where equilibrium is achieved when the quantity demanded equals the quantity supplied at a specific price point. Several conditions, including product homogeneity, free market entry and exit, perfect information, and resource mobility, are essential for sustaining market equilibrium. However, real-world markets often deviate from ideal conditions due to externalities, informational asymmetries, and strategic behavior such as supplier-induced demand. Recognizing these factors is crucial for policymakers and stakeholders aiming to promote efficient markets and protect consumer interests.

References

• Frank, R. H. (2019). Microeconomics and behavior. McGraw-Hill Education.
• Mankiw, N. G. (2020). Principles of economics (9th ed.). Cengage Learning.
• Pettinger, T. (2021). Supply and demand: The basics. The Economics Guide. Retrieved from https://www.economicshelp.org/blog/
• Stiglitz, J. E. (2018). Information and the change in the paradigm in economics. American Economic Review, 81(2), 23-30.
• Shapiro, C., & Stiglitz, J. E. (1984). Equilibrium unemployment as a worker discipline device. The American Economic Review, 74(3), 433-444.
• Laffont, J.-J., & Tirole, J. (1993). A Theory of Incentives in Procurement and Regulation. MIT Press.
• Niskanen, W. A. (1971). Bureaucracy and representative government. Aldine Publishing Company.
• Hood, C. (1991). A public management for all seasons? Public Administration, 69(1), 3–19.
• Becker, G. S. (1976). The economic approach to human behavior. University of Chicago Press.
• Varian, H. R. (2014). Intermediate microeconomics: A modern approach. W. W. Norton & Company.