What Is Supply and Demand?

Understanding Supply and Demand

First Published: ADawnJournal.com April 18, 2010

Two highly important concepts that drive economics around the world is the concept of supply and demand. Supply and demand is an economic model of price determination within an economic market. In supply and demand, it states that in a competitive market the price will function to equalize the amount of quantity demanded by the consumers, with the quantity available from producers. When supply and demand is equal, there is equilibrium between price and quantity.

The concept of supply and demand, and the power of it, has been understood for several centuries, all the way back to Muslim economists Ibn Taymiyyah, who lived during the 13th and 14th centuries, and wrote “If desire for goods increases, while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for its decreases, the price comes down.”

The phrase of supply and demand was first used by James Denham-Steuart in a book published in 1767, and in the iconic economic book, The Wealth of Nations, by Adams Smith; supply and demand is mentioned as well. As things progressed into the 19th century, the idea set in that supply was not fixed but could change and the idea that the price was set by the most expensive price, which itself is the price of the margin. This was a big change from the previous concepts of supply. The famous supply and demand graph, which shows the curves of both, appeared for the first time in 1870 in an essay written by Fleeming Jenkin. This model of supply and demand was further popularized in 1890 in an essay in Alfred Marshall. In this graph, equilibrium is reached where the two points cross.

The Graphic Representation

The model of supply and demand is a partial equilibrium model, which shows the determination of the price of a good and the quantity of the good. On the graph, which most believe was created in its common form, by Alfred Marshall; you have the price on the vertical axis and the quantity of the product on the horizontal axis.

The supply curve represents the amount of a good that the producer is able to, or willing to, sell at a certain price. The demand curve represents the amount of a good that buyers are willing to purchase at a certain price. Usually, the demand curve is represented as a downward slope, so that when the price decreases, customers will begin to buy more of the good.

How It Works

So, how does supply and demand work? Well, when there is a greater demand for a product, and if the product is scarce, then the price of the product is going to go up as a result. In contrast, if the demand for a product is low and the product is abundant, then the price of the product is going to go down as a result. However, if the demand for the product is high, and the supply is high, then we should have reached equilibrium for the product.

Elasticity of Supply-Demand

Elasticity is a very important concept in supply and demand. Elasticity refers to how supply and demand works, and how the price is determined. Elasticity can be defined as the percentage change in one variable that is divided by the percentage change in other variables. So, elasticity is the relative change in supply and demand.

It is very useful to know exactly how much supply and demand will change when the price changes. This is known as the price elasticity of demand and the price elasticity of supply. This helps economists answer several questions including will a tax on a good increase the price, and will it affect the quantity that customers want? Will an increase in the price offset the decrease in sales volume and will someone who holds a monopoly be able to increase the price of a product and not affect the revenue from sales?

The slope of a line corresponds elasticity and it is typically shown as a percentage, so that the units of measure do not matter, only the slope does.

To calculate the elasticity of supply and demand, you take the percentage change in quantity over the percentage change in price. So, if the price moves up by five cents, and the quantity of product sold to go up by two, the slope will be 2/0.05, which is 40 products per dollar. This means that the quantity of the product increased by two percent, the price by five percent and that makes the price elasticity of supply to be 2/5, which is .4, or 40 percent.

Changes in the unit of measurement, or the currency, do not change the elasticity of supply or demand either because it is measured in percentages.

When the demand or supply quantity changes a great deal when the price has only changed slightly, then this is called elastic. However, if the quantity of supply or demand changes a little bit, and the price changes a lot, then it is inelastic.

In macroeconomics, supply and demand has been used to explain the variables in a market economy, including price level and total output. Within macroeconomics, supply and demand is often used in relation to money supply to demand and interest rates as well.

Another important concept within supply and demand is the demand shortfall, which results when the demand of a product ends up being lower than was originally projected as the demand for the product. These shortfalls are typically caused by the over-estimation in planning of new products. For example, when Coke created New Coke, they anticipated a huge amount of demand, but this never materialized. Hence, there was a demand shortfall to what they had expected.

When there is a demand shortfall from demand overestimation, it is typically caused by strategic misrepresentation in which the strategy of a company was flawed, or optimism bias.

Sydney Travel Blog 8: Evening Walk in Sydney

Australia Travel Blog: Sydney City Tour

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Just before the end of the Sydney Harbour Cruise, I was given 2 options: to disembark from the ferry at Circular Quay or at Darling Harbour. I asked one of the personnel at the ferry which stop would be closer for me to reach my hotel in Kings Cross and I was told to get off at Darling harbour.

After exiting the waterfront area, I was on the street and I checked the distance to my hotel on my phone. It was approximately a 35-minute walk or $20 taxi ride. Taking the subway was an option too, but I didn’t feel like riding the subway.

So, I decided to walk. It would be a long walk, but not too long. Later on, I realised that it was a very good decision because it gave me an opportunity to see downtown Sydney and take lots of pictures.

It was Saturday, so there were no office crowds downtown, but lots of tourists and locals were out to simply hang out. It pretty much looked like downtown Toronto on a weekend. That long walk was really beautiful and I enjoyed every minute of it. 

My haircut was long overdue, but I was unable to find a place where I could get a haircut and colour for a reasonable price. I attempted to in Auckland, but I could not find anywhere below $80. When I was close to my hotel, I checked a few barber shops and the cheapest one I was able to find in downtown Sydney was in front of my hotel for $50.

I spent an hour at the barbershop. Once done, I finished my dinner at a nearby fast-food restaurant. The next day, I would be picked up in front of the hotel in the early morning for part 2 of my trip – the Blue Mountains Day Trip.

Foreign Property Mortgages for Canadians

International/Overseas Mortgages for Canadians

First Published: ADawnJournal.com April 22, 2010

Recently released figures suggest that Canadian households have in the past five years increasingly sought to buy properties abroad to add to their own property in Canada. Whether these properties are used for holiday purposes, as a retirement nest-egg or bolt-hole, or merely as an investment, there is a clear benefit to those who can afford it from buying a foreign property for their own reasons. In many countries, it is possible to pick up a bargain – some places will even offer up a number of properties that an assiduous saver could arguably pay for up front in cash. Between this and the comparatively inflated “First World” property markets, however, there are many places where a property can be picked up for a good price, but will still require some borrowing for a purchase to be made.

Getting a mortgage to buy a property abroad is not as straightforward, generally, as finding one to pay for a domestic property. Clearly, it is more so than it used to be – Canadians who wanted to buy foreign properties used to have to find a way around the mortgage question if they wanted to avoid paying large premiums on top of the principal. The evolution of the global mortgage market has reached a point where it is now more than possible to find the right mortgage. Due to financing guidelines it is tricky to get a mortgage in one country for the purposes of buying property in another, so this development has made a big difference for people looking to get into the international property market.

If possible you should always try to get a mortgage in the same country as the property you intend to buy. It may cause a little bit more difficulty up front, especially if there is any kind of language barrier, and if there is such a barrier it is worth getting all documents legally translated as an extra cover for you. However, being able to deal with the bank face-to-face when you are at the property and carrying out any deals connected to it will be to your advantage. As a foreign buyer you will need to provide stronger guarantees to demonstrate your commitment to the property. You may need to put up a larger deposit than a national of the country where you are buying the house or condo, but bear in mind that you are buying a piece of real estate that could cost several times more in your home country and it will not seem as big an issue.

As banking has become more and more internationalized, it may well be possible – and beneficial – to source a deal in your home country to take out a mortgage in the foreign location. Most banks will have a presence or a sister bank in other countries, and if not they will at least have some level of collaboration with banks in those countries. This can make the whole process move a lot more smoothly, and can see you secure a good-value mortgage for an excellently-priced property.

Cross Border Shopping Tips

Canadian Dollar at Par? Learn How to Do Shopping In the States

First Published: ADawnJournal.com April 25, 2010

Currently, as of this writing, the Canadian dollar is worth more than the United States dollar. Against the Canadian dollar, the American dollar is worth 99 cents, a full cent below our Loonie. This is a good time to be a Canadian because most of us can remember a time when the Canadian dollar was worth 40 cents less than the American. That meant for every dollar something was worth in the United States, we paid .40 cents extra. To buy a ten dollar book, we paid $14.00. To buy a $100 stereo, we paid $140. Well for the time being that is no more because Canada is back on top.

Naturally, this means some big benefits to Canadian consumers, not to mention hockey teams that can now save money in Canada (unlike the situation in the 1990s). As a consumer, how are you going to benefit from the high Canadian dollar? Well, through cross-border shopping of course. When you go to the border crossing and exchange your money, you get one cent extra for every dollar you exchange. That may not seem like much but it can add up. It will be awhile before retailers in Canada begin to sell things at American par prices, so why not go to the States and get a jump start on savings?

What are the tips for cross-border shopping?

1.   You are not going down to the United States for a vacation, so keep what you bring minimal. Make the process of going over the border easy by having a Photo ID, a birth certificate and a passport ready at the crossing. In addition, you can eliminate some delays by choosing to eat in the United States, rather than bring a lunch. If you do bring a lunch, do not brown bag it or you will probably have it confiscated. If you have a sandwich with beef in it, you will probably lose it as the United States border is very particular about beef products going into their country.

2.   When you are in the United States, do not buy fruits and vegetables that do not originate from Canada. You are not allowed to bring fruits and vegetables from the United States into Canada.

3.   Forget about using your credit card or your debit card. If you use your credit card, you may not be capitalizing on the rate of the day at that point. Credit card companies do not always credit your card right when you make the purchase, it could be later that day or the next day. So, if you buy something today when the Loonie is worth more, the credit card company might put the purchase through on your credit card tomorrow, when the Loonie is worth less than the American dollar. Also, debit transactions can be done, but they cost you $1.50 per transaction.

4.   When you come back over the border, you have to declare everything and make sure you bring your receipts. If you do not declare all your goods and you are caught, then you lose what you bought, as well as the money you spent. On that same note, if you are in the United States less than 24 hours, you still have to pay a duty if you bought goods. If you stay for 24 hours, you can bring back $50 worth of goods without paying a duty and if you stay 48 hours you can bring back $200 worth of goods without paying a duty.

Monetary Policy and Fiscal Policy

What is the difference between monetary and fiscal policy?

First Published: ADawnJournal.com April 29, 2010

Two of the most important parts of any country’s economics are their monetary and fiscal policies. Many people assume that these two policies are one and the same, but this is not the case. These policies are two different entities that affect a country’s economics in different ways.

Monetary Policy

The monetary policy of a country is the process by which a government or central bank supply money to the populace, thereby affecting the availability of money as well as the cost of money and the interest rate associated with it. This is done to reach a certain set of objectives to help the economy grow, as well as remain stable in difficult financial times. Economists will also refer to monetary policy as being the expansionary or contractionary policy of the country. When it is referred to as the expansionary policy, is when the total money supply of the economy is increasing, while contractionary policy is the opposite, where money is decreasing. These two policies within the monetary policy are also used at different times. When there is a recession, interest rates are lowered to combat unemployment through the expansionary policy. However, if the economy is suffering from high inflation, then interest rates are raised through a contractionary policy.

Interest rates are highly important to the monetary policy of the country and there is a distinct relationship between monetary policy and interest rates. Through the monetary policy, the interest rates of the country are tied in with how much money is supplied and how much is being borrowed. Through this relationship, it is possible to influence the inflation, economic growth, exchange rates and even unemployment of the country.

Nearly all industrialized and developed nations operate their monetary policy through specially created institutions. Examples of these institutions include the European Central Bank for the EU, the Reserve Bank of India, The Federal Reserve System of the United States, the Bank of Canada, the Bank of Japan, the Reserve Bank of Australia and the Bank of England. These institutions are called central banks and they have the distinct task of ensuring the financial system of the country is operating properly.

The most often used tool of monetary policy is open market operations. With this the government can manage the money supply of the country by buying and selling treasury bills, foreign currencies and company bonds. Other tools used by central banks to manage monetary policy include discount window lending, fractional deposit lending, moral suasion and open mouth operations.

Without central banks and a monetary policy, the economy of a country would be highly unpredictable. There would be no way to manage money and recessions could easily turn into depressions and inflation could run out of control. Examples of countries with poor monetary policies include Zimbabwe, which has seen its inflation rate reach unprecedented levels. Whenever a country hits a rough patch, or needs to do some work to keep its economy moving forward, the citizens should be happy they have a good monetary policy in place.

Fiscal Policy

Fiscal policy is not monetary policy, and it is important to make this distinction. A fiscal policy is the use of government expenses and revenue collection in order to influence the economy. This differs from monetary policy, which is used to stabilize an economy through interest rates and money supply.

Fiscal policy uses expenditures of the government and taxes in order to influence the economy. Through the changing of the level of taxation, it is possible for the government to improve the demand and level of economic activity, while also allocating resources and ensuring that income is distributed properly. As a result, the fiscal policy of a country can refer to the effect of the outcome of a budget on the activity of the economy. With fiscal policy, there are three different methods that can be used; neutral, expansionary and contractionary.

With a neutral stance, the budget is balanced, where the spending of the government is equal to the tax revenue that comes in. Therefore, the government gets all the money it needs from taxes and the budget outcome has no effect on the economy activity level of the country.

With an expansionary stance, government spending is greater than the tax revenue coming in. This is done by either lowering the taxes of the country, or by increasing the expenditures of the country while leaving taxation the same. This creates a budget deficit in most cases.

With a contractionary fiscal policy, taxation is greater than government spending. This is done through increasing taxation and leaving spending the same, or by reducing spending. This leads to a surplus for the government in most cases.

There are several ways that a fiscal policy will be funded, not including the largest way which is through taxation. These methods include:

1.   Seigniorage, which is printing money.

2.   Borrowing money from the population.

3.   Using fiscal reserves.

4.   Selling assets like land.

When a deficit needs to be funded through fiscal policy, it is usually done through the issuing of bonds, bills and securities. Since these pay interest, the government is able to collect money on them for a fixed period of time. However, when the government is borrowing money and cannot afford the fiscal payments, it will go into default on its foreign loans.

A fiscal surplus can be saved for future use, in which case it is usually invested in currency or other financial investments until it is needed. When there is an economic slump and taxation as well as income falls, these reserves can then be used to continue funding expenditures at the same rate as before, without having to worry about taking on more debt.

The fiscal policy is very important and has been used several times in the past to help countries get out of recessions, while also helping countries continue operating at pre-recession expenditure levels. Fiscal policies, combined with monetary policies, keep a country’s economy moving forward and benefit everyone in the long run.