Factors Influencing Supply and Demand in the Modern Economy
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Throughout this essay I will speak about the different forces that act upon supply and demand. Forces like manufacturing, the labor market, seasonal changes, economic recessions and depression, technological advancement, and consumer interests. Supply and Demand is a way the economy sees if it’s reached equilibrium between production and consumption. Supply and Demand is heavily influenced by the factors I had mentioned above. Manufacturing costs can cause drastic increase and decreases of prices on consumer goods. The labor market can influence the prices of almost every commodity and service from the food industry to healthcare. Technology has innovated our market in several varying ways. Consumer interests as a whole run the American economy regardless of the effects it has on the nation as a whole. Most of the information gathered for this research paper was obtained through online sources. The results of this paper were mainly expected but a few topics were surprising.
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The purpose of this research essay is to examine and prove how drastic the effects that manufacturing, cost of labor and its scarcity or excess, technology, seasonal changes, economic recessions, depressions, and consumer interests have on supply and demand. The other purpose is to show how the economy and supply and demand curve can reach equilibrium when these changes occur too instantaneously.
I believe that the supply and demand curve has several impacting factors upon to which it must contest with for there to be equilibrium in the market. While consumer interests will always be the main driving force of change in supply and demand in a free market economy there are other factors that affect supply and demand of goods and the consumers interests as a whole. The supply and demand curve can gauge the economic status of a nation and the market, these factors are important to economists to think about when talking about changes in supply and demand and what they are attributed to. This will go more in depth to supply and demand than a regular graph and convey what changes in the economy have on the curve in large.
Supply and Demand are the two most influential driving forces in economics. You can compare Supply and demand to a seesaw trying to reach equilibrium between the price of products and the amount of items purchased. Companies vary their production amounts and prices based on how demanded the products are by the consumers. In a free market economy supply and demand is consumer driven, the amount a product can sell for is dependent upon the consumers interest. The law of supply states that at a higher price a seller will produce more of a product. The law of demand states that at higher prices, buyers will demand less. (Chappelow, 2019)
The law of demands states that if all factors remain constant the higher the price of a commodity the fewer consumers will purchase that good. This real requires on all other things being constant other then price. However things do not often stay constant, the price of goods fluctuate drastically over the years, they fluctuate for several unique reasons. Some of these factors include price of labor and raw materials, consumer interests in certain products, trends, government intervention, and the state of the economy as a whole.
During the great recession in 2007-2009 in The United States, there was a total decrease in spending of one hundred billion dollars. This significant decrease in sales can be drawn back to an increase in unemployment. In January 2007 the unemployment rate was 3.8% that later increased to 7.5% by the end of 2009. That’s 8.2 million jobs lost in a 2-year period. That causes a huge strain on the economy that isn’t prepared for a large increase of unemployed Americans. (The Bureau of Labor Statistics, 2012).
These effects on the economy can be further exacerbated when an economy or region goes through a depression. The difference between a recession and a depression is that a depression is a prolonged period of economic recession, a recession has to last at least 6 months and have multiple quarters of economic contraction where a depression needs multiple years of economic contraction. (Federal Reserve Bank of San Francisco, 2007). During a recession or depression most producers lower their prices and face the lower profits to drive affected consumers into their stores. H&M (the Swedish multinational clothing company) for example increased their discounts by 20% during the economic recession from 2007-2009(Karlsson, 2010). The company made this decision for the mutual benefit of the consumer and the company. Supply and demand is a complex balancing act and any misalignment can have drastic consequences for the consumers and producers of the market.
Recessions and depressions are just one of the many factors that can inflict change on the supply and demand curve. One that is less thought of is how different seasons impact different companies and service industries. There are several industries that are positively and negatively impacted through changing seasons. During the Christmas season Americans spent 1.018 trillion dollars. That’s a whooping 10% of all money American citizens spent in one year. This money is spent on apparel, toys, electronics, and travel. Many people believe the consumer of Christmas has negative effects on the working American however that is just not true, Christmas shopping creates jobs, increases GDP, and gives the U.S. an overall economic boost to end the year.
Another seasonal change that affects supply and demand is the summer’s affects tourism. Tourism peaks during the summer from mid-June until the end of August. Many areas of the U.S. and parts of Europe are solely dependent on tourism. For example Orland, Florida receives 18.9% of its overall GDP through tourism, Las Vegas 16.7%, and Miami 8.80% (Smith, 2018). Without tourism this areas of the United States would see a drastic decrease in employment. These cities understand this and to keep the demand for tourism high they spend millions on advertising every year. Las Vega alone spent 101.5 Million Dollars in advertising during 2018 (Velotta, 2018).
The labor market is a very dynamic group of working individuals. The individuals in market can change rapidly and so can their attitudes towards different labor opportunities. A large influx of immigration can provide the labor market with a fresh work force ready to work in unskilled positions. The labor market has its own supply and demand. However instead products being the supply its workers and instead of a demand for goods it’s a demand for workers and their particular skill sets.
Supply and Demand in the labor market operates essentially the same as it does with consumer products. If a job has a high demand for workers they’re willing to pay more those individuals to work for them. If you were to be a member of the labor market working in a very unsaturated field that has a high demand you will be more likely to receive a higher wage. The same goes for the inverse. If you are unskilled and are only willing to work a job in manual labor that is heavily saturated you will either have to take a wage cut or be unemployed (Schieltz, 2017).
The labor market also has an effect on the supply and prices of consumer goods and services. A great example of this is healthcare in the United States. Doctors in the U.S. must spend several years of their lives going through education, training and then further specialization. This then in turns drives the cost of healthcare up. With physicians the demand is only increasing further while the supply is not. This will lead to a shortage of physicians, which will further drive the cost of healthcare up. The way this problem can be solved is by reaching equilibrium. To achieve this you would need to either increase the acceptance rates of medical students, increase the demand to go to medical school, or find a solution that makes medical professionals more efficient. One way hospitals have tried to curb this issue is by implementing loan forgiveness. If you work for certain healthcare systems for a predetermined amount of time you can have the health system pay off your student debt. (Association of American Medical Colleges, 2019)
Many other job markets are implementing the same loan forgiveness as hospital systems are with their medical professionals. These jobs include lawyers, teachers, Peace Corps and AmeriCorps volunteer organization, Federal service employees and public service workers. The reasons all these fields have implemented these programs in an attempt to reach equilibrium with supply and demand. With products this task is much simpler, the company can either decrease production or lower prices, with jobs that are a necessity for a functioning society you cannot just decrease the amount of workers or offer them lower pay.
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When speaking about supply and demand some economists will often refer to something called the invisible hand. The invisible hand is a group of factors that directly affect supply and demand but are often unaccounted for by regular people. The invisible hand is comprised of capacity, technology, cost structure, complements, and perceptions of future prices. Capacity refers to the maximum amount of output a company can sustain to make a product or sustain its services. In the early 2000s the telecommunications industry reached capacity. The abundance of cellphones, televisions, and computers, completely outstripped the demand for these products. This in turn caused a decrease in the prices of the items and a decrease in production. Cost structure refers to the price a company pays for raw materials, labor, equipment, and everything else necessary for manufacturing (Gorman, 2009).
Manufacturing costs have one of the largest impacts on supply and demand. When there is a drastic evolution in manufacturing methods that causes a decrease in the cost, time, and labor of manufacturing the price of the item being produced can drastically decrease. The best example of this is the technological revolution and the cost of computers, cellphones, telephones, and other electronic devices. In 1971 the cost of one gigabyte of memory would’ve cost you 250 million dollars. Today one gigabyte of memory costs about 3 cents, that is 0.00000000012%, the cost of what it was back in 1971. The tech revolution has caused a decrease in price never before seen in history. With this decrease in price came a very predicted increase on demand. Today it is almost impossible to enter an American household and not find a TV, computer, and a cellphone.
Changes in the cost of manufacturing do not always occur in the benefit of the consumer. With third world countries developing and human rights movements occurring across the globe many manufacturing plants and sweatshops are seeing an increase in the cost of manufacturing. The biggest influence on this is a rise in the cost of labor. Many manufacturers have moved over seas to reap the benefits of lower minimum wages in developing nations. These moves helped fuel economic booms in the U.S. However the quality of the products suffered. These lower quality, cheaper goods so a rise in demand from lower, working class Americans. Where as more affluent Americans continued to purchase the more expensive, better quality manufactured goods. One area you don’t have a choice on in quality of tools is healthcare. Hospitals in the U.S. are governmentally mandated to purchase tools from approved manufacturers. These manufacturers act in their own economic bubble as monopolies. They mark up their prices up to 700% because hospitals have no other options (PhRMA Research Organization, 2017).
The supply chain as whole has serious implications on supply and demand today more then ever. With the introduction of ecommerce in the last decade, the supply chain of the past no longer exists. Prior to ecommerce consumers had to purchase products through a slew of middlemen. A product could pass through several hands before ever reaching its final destination and each exchange increasing the price of that commodity (Rakuten Super Logistics, 2018). Today websites like Amazon, Overstock, AliBaba, Jet, and Rakuten have revolutionized the supply chain, as we know it. These websites drive the cost of products down by directly linking consumers with manufacturers. These websites help increase the demands of goods by decreasing the price of the goods being sold.
Ecommerce has even changed the economy for small mom and pop shops. Giving them the opportunity to connect to more customers with the web. This is especially help for niche products that are not easily and readily available at other retailers. With the Internet you can find any product you desire with a few minutes of research. The best thing about the growing economy and internet is the wide variety of products searched and purchased (The Belford Group, 2016).
Some regions have important staples to their diet that take an important role in that regions economy. These are known as food staples. In the world there are 50,000 edible plant but only 15 of those make up 90% of the worlds food energy intake. Rice, corn, and wheat make up 60% of this (National Geographic, 2014). Factors such as improved agricultural techniques and genetically modifying these organisms has taken away region specific food staples and made food more widely available. The supply and demands for these food staples are almost at a perfect equilibrium. To ensure that these staple foods are always available organizations have created a buffer to ensure price stabilization of seasonal staples.
The problem with staples foods on a supply and demand curve is that you do not want the demand for the necessity to exceed the supply. Organizations struggle with the issues of world hunger and try to combat it with these easy to grow foods. If the supply of these foods were to decrease significantly you would see destabilization throughout the regions were they are heavily consumed. This destabilization will cause a cascade of economic issues on neighboring nations. The staple food supply and demand curve is like no other we discussed so far.
Many nations have laws in place to ensure the producers have easy access to land and agricultural tools while ensuring the price of these foods stay stable and easily accessible for all inhabitants of the nation. The ability to ensure your citizens with a meal is a way to keep your country and economy stable.
Supply and demand is a fragile tight rope act that is easily influenced by minor changes in the economy. Small changes like price and trends can easily change the curve of supply and demand. The factors listed in my research paper prove no different. A free market economy like the one we experience in The United States has so many factors influencing it that we can often over look topics such as the affect a seasonal change can have on a market even though those seasonal changes account for communities tourism business and the economic growth seen during the holidays. As a whole the ideas I set out to examine proved several of the ideas I already believed as true but more importantly enlightened me to the more nuanced issues faced in the macro economy.
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