Emerging Issues in the Laws of Demand and Supply
The laws of demand and supply are the most foundational laws in the world of business and economics. According to Economists, the law of demand states that holding all other factors constant, an increase in price for standard commodities results to decrease in quantity of commodities required and that decrease in the price of the commodity results to increase in quantity demanded the commodity. Moreover, that the law only holds for normal commodities (commodities that obey the law of demand) only. The law does not hold for other categories of commodities such as goods of ostentation/Veblen commodities as well as commodities of inferior quality and necessity (Frank, 2014).
The factors held constant for the law of demand to apply includes the prices of related goods (in this case substitutes and complementary commodities), consumers’ income levels, as well as population size and demographic structure (Frank, 2014). Other factors also held constant include consumers’ income distribution, future expectations in the changes of prices of the commodities, government policies, consumers’ religious and cultural beliefs, government policies (such as price controls and taxation), consumers’ tastes, preferences and fashions as well as climatic and weather changes.
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On the other hand, the law of supply states that holding all other factors constant, an increase in price for normal commodities results to increase in quantity of commodities supplied to the market and that a decrease in the price of the commodity results to decrease in quantity supplied for the merchandise. Similarly, the law only holds for normal commodities (commodities that obey the law of supply) only and not Veblen, inferior or necessity commodities (Lin, 2011). The factors held constant in the law of supply include the level of technological advancement, the price of related commodities, production costs, availability of the factors of production (in this case Land, labor, capital and entrepreneurship/management ) government policies (taxes, quotation of production and introduction of subsidies). Other factors held constant include, the time taken to adjust to market change, natural/ uncontrollable factors, future expectations of price changes and changes in the number of producers. The two laws, therefore, result in the establishment of equilibrium price in the free market economy (Lin, 2011).
However, the increased global competitiveness of firms within both manufacturing sector as well as the service sectors has led to the emergence of new market environments that have hidden risks that influence the pricing of commodities on other grounds and not because of price mechanisms (forces of demand and supply). The emerging market has resulted in price discrimination especially by multinational organizations that monopolize the markets. Most business organizations have shifted from the local physical operations within a given county or state to the modern global based online trade where firms can provide the target customers located in different geographical locations using the online platform.
Lastly, most firms have also invested in profitable options within foreign countries. Such investments enable the company’s shareholders to benefit from the dividends paid while the local government benefit regarding increased revenues regarding increased business taxes. Unfortunately, such investments are prone to external threats such as the resistance by sections of the political sections as well as political events themselves (Lin, 2011). Moreover, the firm’s investment may be jeopardized by the changing social attitudes and economic crises affecting such nations. In this regard, the market prices are also prone to macroeconomic threats. In this regard, inflationary pressures may influence the pricing of the commodities and the economic stabilization procedures adopted by the government may also influence the pricing and demand/ supply of the commodities. Such restrictive assumptions in the laws of demand and supply (including the considerations of dynamic nature of technological growth as constant) are an issue of great concern in modern economics today (Lin, 2011).
References
Frank, R. (2014). Microeconomics and behavior . McGraw-Hill Higher Education.
Lin, J. Y. (2011). New Structural Economics: A Framework for Rethinking Development 1. The World Bank Research Observer , 26 (2), 193-221.
