The forces of demand, as well as supply, have been studied in economics as the backbone to understanding any economy. However, as illustrated through the video simulation, the principles affecting the performance of an economy, as influenced by demand and supply, are categorized into either macroeconomic principles or microeconomic principles (Melvin, 2011).
Macroeconomic and Microeconomic Principles
From the simulation, two macroeconomic concepts arise, the aggregate demand and aggregate supply (Melvin, 2011). The concept of aggregate supply explains the total amount of commodities or services that are produced within a given economy in a given time and with a given price. Therefore, the supply explains the real output of all firms in an economy in terms of services and goods. Secondly, the video simulation illustrates the concept of aggregate demand. The concept of aggregate demand explains the total quantities of goods as well as services the economy faces at a given period (Melvin, 2011). On the other hand, the simulation illustrates two microeconomic concepts, including the supply and demand curves. The supply curve illustrates how prices influence the output of goods and services in the short run. The demand curve shows the relationship of purchases of goods and services and the prevailing prices in the short run. Therefore, the classification of these principles as either macroeconomic or microeconomic has been influenced by the nature of these principles as being short-term or long-term. While the relationships of micro-economic in supply and demand curves are observed in the short-term, the macroeconomic principles of aggregate demand or supply are observed from the long-term (Melvin, 2011).
The shift of the supply curve: The video simulation presented illustrates a shift of the supply curve of pears as influenced by the changes in price. In the illustration, when the prices of the pears rise, the supply curve shifts to the right indicating a rise in the market supply of pears (Krugman & Wells, 2009).
The shift of the demand curve. From the illustration, when the prices of the pears fall, the total amount of pears demanded rises, hence explaining the shift of the demand curve towards the right. Therefore, the shift of the curve towards the right indicates a rise in demand of the pears (Krugman & Wells, 2009).
Causes and Effects of the Shifts
These shifts of the supply and demand curves were explained by the changes in the market price of the pears. The supply curve shift to the right causes the lowering of the prices of the pears while increasing the amounts of pears demanded. As such, consumers decide to purchase more of the pears as explained by lowered prices (Frank & Bernanke, 2007). On the other hand, when the demand rises and surpasses the supply, the prices of the pears tend to rise. The rise in price exerts pressure on the demand, which responds through falling. Therefore, an increase in price causes a drop in the volumes demanded, hence, the shift of the curve. In Addition, the shift in demand curve towards the right shows a rise in the quantities demanded, thereby explaining the implication of the price changes in the decision making of the consumers. Therefore, while the supply prices affect the suppliers in decisions on volumes to supply, the prices of demanded goods affect decisions of the consumers on volumes to purchase (Frank & Bernanke, 2007).
Effects on Real Life Scenario
The illustration of the shifts of the demand and supply curves as influenced by the pressures of prices is arguably quite real in life. For instance, when the prices of the basic commodities like sugar fall, the demand for the sugar is likely to rise. However, the effects could be an expected rise of the product due to lower supply. The pressure created by the demand and supply force explains the equilibrium price that arises (Frank & Bernanke, 2007). As such, one can understand the reason the suppliers create an artificial shortage of such a product to trigger the prices to rise. Besides, such an understanding has an effect in explaining why consumers decide to buy in bulk when the prices are lower and lower the purchase habits when the prices are high (Frank & Bernanke, 2007).
Effects of Understanding Microeconomic Principles
The microeconomic effects are observed from the short term, and therefore, one can interpret the effects of such changes of prices and amount of commodities demanded or supplied within the short-run. The understanding of micro-economic principles enables economic agents to understand that the interaction between suppliers and consumers in the short run is influenced by the price effect on the supply and demand sides (Krugman & Wells, 2009). Accordingly, one understands that when the prices fall, higher quantities are demanded, and supply tends to fall in the short run. Besides, an increase in the prices is likely to cause an increase in the supply while lowering the demand of the commodity (Krugman & Wells, 2009).
Effects of Understanding Macroeconomic Principles
The macroeconomic effects of supply and demand curve shifts are determined in the long-run (Frank & Bernanke, 2007). Besides, the effects are determined by the aggregate effects, thus explaining that the shifts are understood in terms of the total volumes of goods/service produced or demanded in an economy over a given time. Therefore, understanding the macroeconomic principles enables the economic agents to make the decisions based not on the short-run, but rather on the long-run. As such, as an economic agent analyzes and predicts the long term performance of an economy as influenced by the pressures of demand and supply. Besides, this can be done by analyzing the aggregate levels of both supply and demand (Frank & Bernanke, 2007).
Effects of PED (Price Elasticity of Demand)
Price elasticity of demand explains the relationship that is exhibited by the percentage change in quantity demanded of a particular product and the percentage change in the product’s price. The elasticity is shown to be elastic, inelastic, perfectly elastic, or perfectly inelastic (Lipsey & Chrystal, 2007). The price elasticity of demand has a direct implications for a consumer purchasing habits, as well as, the supplier’s pricing strategy. As illustrated from the video simulation, the supplier determines the prices by setting the revenues anticipated. As such, when a supplier intends to realize higher revenues, the prices are set according to the volumes purchased.
As a supplier, one can raise or lower prices or even apply the price discrimination policy where different prices are set for the same commodity at the same time. For instance, when the demand is elastic, then reducing the prices lead to higher revenues. On the other hand, if the demand is inelastic, then raising the price would lead to higher revenues (Lipsey & Chrystal, 2007). Therefore, the setting of the prices as informed by the price elasticity of demand directly affects the purchasing habits of a consumer. For instance, when the demand is elastic, more of the commodities would be demanded while if inelastic, only a few commodities can be demanded (Lipsey & Chrystal, 2007).
Frank, R., & Bernanke, B. (2007). Principles of economics (3rd ed.). Boston: McGraw-Hill/Irwin.
Krugman, P., & Wells, R. (2009). Economics (2nd ed.). New York: Worth.
Lipsey, R., & Chrystal, K. (2007). Economics (11th ed.). Oxford: Oxford University Press.
Melvin, M. (2011). Principles of economics (8.th ed.). Mason, OH: South-Western, Division of Thomson Learning.