Demand and Supply AnalysisName: Amer AlotaibiIndiana University of PennsylvaniaDemand and Supply AnalysisDemand and supply curves show how buyers and sellers respond to price changes of a commodity like wages. These changes cause curves to shift in position.
Factors which determine demand are number of buyers, changes in income and change in tastes and preferences. A shift in demand curve is also caused by changes in the price of other commodities. Changes in future expectations among buyers with relation to future prices also determine demand. Shifting derived demand is caused by changes in marketing costs. Factors that affect supply in the short-run are storage costs, future expectations of price and change in financial conditions.
Costs of production, relative prices and technology affect supply in the long-run. Specific commodities respond differently to changes in price. In this case, price elasticity is used to measure the responsiveness of the quantity demanded or supplied to changes in price.
Elasticity which determines the slope of demand and supply curves is given by the relation;Ep=%?Q/%PWhere Ep= price elasticity, %?Q= percentage change in quantity and ?P= percentage change in price. Commodities with price elasticity is greater than 1 (Ep>1) are said to be elastic. Those with elasticity equal to 1 (Ep=1) are referred to as unitary elastic. Commodities with a price elasticity less than 1 (Ep<1) are described as inelastic.
Scenario 1. Rental price offered by Airbnb depends on the type of the house and country. Prices are affected by seasonal demand and local events. For example in Sydney, prices jump during festivals due to increased demand. Peak corporate activity causes a high demand for hotel accommodation. Labor created as a result of increased demand is an employment opportunity.
Fig.1. Behaviour of supply and demand due to Airbnb inelastic-elastic approachThe company uses price discrimination strategy. They raise prices when demand is inelastic and cut down prices when demand is elastic.
The above curve shows a switching relationship between Airbnd and local hotels. Cutting down prices will increase demand of labor causing price wages to go down from W2 to W1 as equilibrium shifts to W1Q1. During inelastic demand quantity of labor needed Increases from Q1 to Q2 as wages increase to W2.Scenario 2. Raising the minimum wage bill for workers in local ice cream shops will force the business to allocate more funds for wages. This will cause them to increase ice cream prices for them to remain profitable. Increase in wages will also increase wages which exhibits great elasticity. This will cause increased demand for work which cannot be supplied in abundance by the shop owner.
Fig 2. Supply and demand curves for immediate increase in wagesAn immediate increase in the minimum wage from $10/hr will force the owner to lay off some workers. Increasing wages from We to Wm will cause a shock thus causing a kinked supply curve. The supply increases rapidly due to favourable wages for workers. Demand for labour by the owner reduces from Qe to Qm which represents unemployment. Fig.3.
Demand and supply in the labour market in the long-runA period of one year will allow owners increase ice cream prices and wages gradually. They will increase wages from W to Wmin. This will force them to reduce number of workers from L to LD.
The supply will eventually increase to LS as owners demand labor only at LD. Workers between LD and LS will remain unemployed. Scenario 3 Immigrants present a good source of substitute or complementary labor. More labour represents more input which will most likely lead to more output. Increasing labor supply produces more goods and services which is translated to higher national output. Immigrants also provide a cheap source of labor.
This means the cost of inputs in production will go down. Fig. 4. Behaviour of demand and supply for skilled and unskilled labour marketMore immigration of skilled labor increases the number of workers from L1 to L2 which represent new employees.
The supply of labor increases from S1 to S3. Domestic wages for unskilled labor will go down from W1 to W3. Most immigrants provide unskilled labor.
Demand and supply curves of US unskilled labor market show more elasticity. Increased in migration between L0 and L4 provides an equilibrium in the unskilled labor market. Further migration will increase labor from L4 to L2 which represents the new labor and L0 to L4 will represent displaced or substituted workers. Wages will also go down to W2 as the supply shifts towards the right.