Supple and Demand Simulation Essay

Submitted By lilmama72786
Words: 772
Pages: 4

Supply and Demand

In the simulation, we used supply demand curves to determine the equilibrium in the market for two bedroom apartments on lease. We differentiated between movement along and shift of the demand and supply curves, and determined how equilibrium was re-established after one or both curves shifted. We observed the demand curve with the current rental rate and quantity demanded, and the change in quantity demanded and vacancy rate when we selected particular rental rates. The demand curve for any product is an imaginary line at a point in time. This tells you the quantities consumers would demand at various prices of the product. The point at which quantity demanded equals quantity supplied is the equilibrium point. At equilibrium, the market is in a state of balance and there is no incentive for either suppliers or consumers to change their respective quantities. The rental rate corresponding to this point is called equilibrium rental rate, and the corresponding quantity is called equilibrium quantity. The concepts of supply and demand are fundamental to understanding many real world occurrences. The demand curve is downward sloping, and that quantity demanded increases as the price decreases—that is, as you move down the demand curve. Goodlife could increase the quantity demanded of its rented apartments only by reducing the rental rate. The supply curve is upward sloping, and quantity supplied increases with an increase in price—that is, as you move up the supply curve. An increase in rental rate would cause Goodlife to lease out more apartments. Quantity demanded equals quantity supplied only at the equilibrium point. At prices below equilibrium, the quantity demanded exceeds quantity supplied and there is a shortage in the market. That is, consumers are willing to buy more than producers are willing to sell at this price. This causes price to increase. As price increases, quantity demanded decreases and quantity supplied increases. This adjustment proven continues until equilibrium is attained. Similarly, at prices above equilibrium, quantity supplied exceeds quantity demanded and there is a surplus in the market. Producers are willing to sell more than consumers are willing to buy, which exerts a downward pressure on price. The price continues to decrease until equilibrium is attained. Demand and supply are not static; various factors cause them to increase or decrease. For instance, an increase in population caused demand for Goodlife’s two-bedroom apartments to increase, but a change in preferences caused demand to decrease. Similarly, a change in expectations caused supply of two-bedroom apartments to decrease. These factors cause the demand or supply curve to shift to the right or left. A change in price, on the other hand, causes upward or downward movement along the same demand or supply curve. The price elasticity of demand affects a firm’s pricing decisions by determining the optimal profit margin. Price elasticity of demand describes the rate of change of demand in response to a change in price. The higher it is the higher demand changes in respond…