Hi! Today, let's get straight to the point and discuss about the core concepts in economics. 1. Markets 2. Supply and Demand 3. Elasticity MARKETS Let's start with markets. According to investopedia.com, a market is defined as "A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange.", a market is not always a physical place. An economy consists of many different markets. With no markets, there would be no cash flowing or products switching hands, meaning no economy. SUPPLY AND DEMAND Now, one of the basic concepts that affect a market is the concept of supply and demand. Simply speaking, supply refers to the quantity of services or products available while demand refers to the quantity desired or wanted by the people. Through analysis, these two factors can be used in great effect to identify and find the price of a particular product. Let's divide the concept into two: the law of demand and the law of supply. The law of demand states that when the price of a product rises, the quantity demanded of that product also goes down. In other words, price and quantity demanded are inversely related. Demand can be shown either via a demand schedule (table form) or a demand curve (graph form) The law of supply on the other hand states that when the price rises, the quantity supplied of that product also goes up. In this sense, price and quantity supplied are directly related. Supply can be shown either via a supply schedule (table form) or a supply curve (graph form). When price is changed, the effect on the demand or supply is represented in the graphs by a movement along the line. Supply and demand however, are subject to shifts too. A shift in supply or demand is different from a movement because it isn't price that is affecting the demand/supply but rather, other factors such as the number of buyers, consumer preference, technology, etc. When we grasp supply and demand completely, we can then graph them together to form the graph for the market of a particular product. With the market graph, we are able to assume the market equilibrium. A market equilibrium is achieved when the quantity supplied and quantity demanded meet, shown in graph form as the intersection of the demand curve and supply curve. It is the ideal goal for most products as the consumers' demand is met yet at the same time, the suppliers do not waste any resources, therefore the market is in its most efficient state. The opposite of an equilibrium is a disequilibrium, wherein the market is inefficient. There are two kinds of market disequilibrium - shortages and surpluses. Shortages are when the supply is not enough to satisfy the demand of a product, on the other hand, surpluses are when your supply exceeds that of the demand, meaning not all your products are sold. Simply speaking, a shortage is when you have too little supply and a surplus is when you have too much supply. A shortage is portrayed in a graph when the point is below the market equilibrium while a surplus is above the market equilibrium as shown below. In summary, demand and supply govern the price of products and market equilibrium is the ideal goal for products wherein demand and supply match perfectly and everyone is satisfied. However, most of the time, the market is in disequilibrium - either shortages or surpluses - and the price should move towards equilibrium. ELASTICITY
The next major concept is elasticity. Elasticity is a very broad term however, we're only tackling the price elasticity of supply and demand. Price elasticity of supply/demand is the responsiveness of the supply/demand when the price is changed. A product is elastic if the demand or supply shifts considerably due to a price change. Inversely, if the product's supply or demand is not affected significantly by the price change, then it is considered inelastic. Like supply and demand, elasticity also has determinants to shifts. An example is whether a product is a necessity or a luxury. Luxury products like iPhones, watches and shoes are usually considered elastic because as they are not essential to life, if prices are raised, significantly less people would buy it. On the other hand, necessities like water and electricity are inelastic because no matter the price change, people would still buy them as they are essential. CASE ANALYSIS - MARKET FOR RICE IN THE PHILIPPINES Now, let's examine a product where we can apply all these concepts. Let's look at the market for rice in the Philippines. Rice is considered a necessity in every household in Asia, most especially in the Philippines. It is present in almost every Filipino meal and is a staple food, therefore we can conclude that the demand for rice is extremely high. Regarding the supply of rice, until very recently, we have had a shortage of rice - becoming increasingly dependent on imports from countries like Vietnam to supply our rice. If there is a shortage, we can assume that the price of rice has increased. According to the Official Gazette of the Philippines, the price of rice was 40.57 pesos per kilo in 2014. However, a recent report by the Philippine Star, dated July 21 2015, has indicated that the price of rice is now 32 pesos per kilo. Both sources suggest that the decrease in the price of rice can be attributed to the present abundance of supply in rice that is actually leaning towards a surplus. However, remember that products can either be elastic or inelastic. In the Philippines’ case, rice has an elastic demand because it is considered a necessity by most Filipinos, therefore we conclude that demand will not be affected by price and people will still buy rice regardless. Hopefully, the analysis of rice has helped you understand the various economic concepts I’ve discussed today but more importantly, help you realize economic problems such as this one and analyze them in a basic manner. Thanks for reading! Sources: Domingo, R. (2015, January 3). PH seen importing 1.8M tons of rice in 2015. Retrieved August 28, 2015, from http://business.inquirer.net/184385/ph-seen-importing-1-8m-tons-of-rice-in-2015 Valencia, C. (2015, July 21). Rice supply abundant, no additional imports eyed. Retrieved August 28, 2015, from http://www.philstar.com/business/2015/07/21/1479080/rice-supply-abundant-no-additional-imports-eyed Rice prices decline by P2 per kilo | Official Gazette of the Republic of the Philippines. (2015, March 25). Retrieved August 28, 2015, from http://www.gov.ph/2015/03/25/rice-prices-decline-by-p2-per-kilo/ Image Sources: http://www.shmoop.com/supply-demand/supply-curve.html http://www.shmoop.com/supply-demand/demand-curve.html http://www.policonomics.com/supply-and-demand/
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AuthorHi, I'm Gabriel, a high school student at Xavier School writing this blog about economics aimed towards teenagers. Have fun! Archives
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