Complete 3 page APA formatted essay: Price and Demand.Download file to see previous pages... the change in quantity demanded will be different for an equal change in price of substitutes as compared t

Complete 3 page APA formatted essay: Price and Demand.

the change in quantity demanded will be different for an equal change in price of substitutes as compared to compliments.

With substitute goods such as brands of cereal or washing powder, an increase in the price of one good will lead to an increase in demand for the rival product. Cross price elasticity will be positive. With goods that are in complementary demand such as the demand for DVD players and DVD videos, when there is a fall in the price of DVD players we expect to see more DVD players bought, leading to an expansion in market demand for DVD videos [1].

In case of substitutes people abandon an expensive product to get its substitute at lower rate. It is so because substitute is a good which is indistinguishable in use from another. If two goods are perfect substitutes, their prices must be the same if both are to be used: the elasticity of substitution between them is infinite, and any price difference will lead to all consumers choosing the cheaper [2]. But, complimentary goods will see an increase in demand for both of the goods as people have to buy both of them to get benefited. But weak compliments will have inelastic cross elasticity of demand and close compliments will have elastic cross elasticity of demand.

With an increase in demand, price of a product moves in the upward direction. ...

But, complimentary goods will see an increase in demand for both of the goods as people have to buy both of them to get benefited. But weak compliments will have inelastic cross elasticity of demand and close compliments will have elastic cross elasticity of demand.

All this implies that an increase in price in one market leads to an increase in demand in another market but the amount of change will be always be different for compliments and substitutes.

1. http://tutor2u.net/economics/content/topics/elasticity/cross_elasticity.htm

2. JOHN BLACK. "perfect substitute." A Dictionary of Economics. 2002. HighBeam Research. 17 Apr. 2009

Part b)

Explain why an increase in supply in a market has different effects in the short run and the long run. Use a diagram and relevant examples. refer to the concept of elasticity. (50%)

With an increase in demand, price of a product moves in the upward direction. Considering this increased price, producers start to produce more goods to earn more profit. When looking at things from other direction, you can say that producers have to deal with an increased marginal cost of production to increase the output and they can produce more things only if they get more money to cover their marginal cost of production.

However, the increase in supply usually creates an impact on the overall market but the amount of increase is different due to different factors. Following are few of the factors affecting supply of a product.