Demand & Supply And Its Changes Essay

Questions:

1.As a producer, why is it Important to consider the Price Elasticity of Demand of your product when setting the price you are going to charge?
2.Explain the difference between Comparative advantage an Absolute advantage.

Answers:

Introduction

The present study is based on understanding the effect of price elasticity of demand in the situation where the individual is willing to change the price of the product and discuss how it is important for producers for making trade decisions and production plan. Further discussion regarding the difference between comparative advantage and absolute advantage will be provided.

Analysis

1.Pricing of the product is important to survive and attain stability in the market thus it is important for setting up the price by considering the elasticity of the product. Price elasticity is a tool to measure responsive of the goods and services demanded when an individual is planning to make changes in the price (Thimmapuram & Kim, 2013). It will predict the effect on the sales if price changes thus it helps in determination of price policy.

It is helpful for the producer because on the basis of price elasticity he will decide about production. The producer always wanted to create an optimum mix of the various product. Therefore, producer generally prefers the product which has high elasticity. Demand is elastic when a change in price will affect major change in demand for the product and vice versa in the case when demand is inelastic (Coglianese and et.al. 2017). Producers can also measure the amount of shift of tax burden to the consumer if they increase the price of the product. Consumers bear the larger amount of indirect tax is demand is inelastic and vice versa in the case of elastic demand. It is also important when we talk about the determination of factors price because Factor with an elastic demand is always lower price as compared to a factor with comparatively inelastic demand.

2.Difference between comparative advantage and absolute advantage

Comparative advantage refers to the capability to produce goods at lower opportunity cost than others in the same industry (Levchenko & Zhang, 2016). Comparative advantage helps the countries to specialize in production of goods which have low opportunity cost which results in increase in productivity if one nation has a comparative advantage over another, then both countries can take benefit from trading because each nation will obtain goods at a price which is comparatively lower than their own opportunity cost of producing that particular good (Levchenko & Zhang, 2016). On the other hand, a producer who requires a lesser quantity of input in the production of goods is known to be an absolute advantage in producing that good.

Contrasting to Absolute and Comparative Advantage, PPF of a country can be measured regardless of making any comparison against other nations. For better understanding of this aspect following example can be considered.

Capital K per worker

Consumables C per worker

Labor Force

Nation A

10

55

2.5 million

Nation B

75

60

1 million

Above table shows that Nation A has higher labor force but in aspect of per work aspect their production is comparatively lower than Nation B. By considering assumption that value of worker in both country is equal, then cost for nation A is higher and are capable of producing fewer goods (Levchenko & Zhang, 2016). This shows that Nation B has absolute advantage in terms of production of K and C. Further for revelation of Production Possibilities Frontiers, we are required to consider production capacity of each nation by multiplying per worker output with number of workers which is as follows:

Capital K

Consumables

Nation A

25,000,000

137,500,000

Nation B

75,000,000

60,000,000

By plotting K on Y axis and C on X axis, PPF for both nations will be as follows:

Any production level falls on PPF is considered to be feasible and efficient for growth and development of economy. In the absence of trade, both the countries are focused on consumption of combination they fall under their PPF however trade in both nations can improve living standards and productivity as Nation A will provide workers on the other hand Nation B will provide resources.

Conclusion

This study is helpful to reveal the present scenario of demand & supply and its changes. This study contains several factors some simple and some complex which helps to understand the price elasticity. The producer gets the reasonable accuracy of the economic condition in which we are living

Refrences

Coglianese, J., Davis, L. W., Kilian, L., & Stock, J. H. (2017). Anticipation, tax avoidance, and the price elasticity of gasoline demand. Journal of Applied Econometrics, 32(1), 1-15.

Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111.

Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111.

Thimmapuram, P. R., & Kim, J. (2013). Consumers' price elasticity of demand modelling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), 390-397.

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