Economics Term Paper

  • Uncategorized

EconomicsTerm Paper

Supplyand demand are fundamental concepts that are highly applicable in thenational and global economy and remain the most significant factorsto each and every enterprise. The reason is that business managersmust utilize these concepts in ordering and organize inventories toensure that adequate services and products are available to all theclients that are willing to purchase them. Consequently, anappropriate understanding of demand and supply is significant becausea business can undergo loss or profit depending on its ability toapply the knowledge gained from the two concepts. Elasticity andinelasticity of demand are comparisons between demand and price forcertain services and goods in the economy. Elasticity andinelasticity are valuable in the process of making pricing decisions.The great depression and great recession are among the biggesteconomic crises, and they occurred at different times. They havevarious similarities and differences and the activities of theprevious and existing federal government can be blamed for the greatrecession. This study reviews the concept of demand and supply,elasticity and inelasticity and their significance in businesses.Moreover, the paper reviews similarities and differences betweengreat depression and great recession as well as the party that is toblame for the great recession.

Theconcepts of supply and demand

Supplyis the quantity of particular services and goods that are availableat a certain time to the customers. Customers willing to purchaseservices and commodities may exhaust them thereby leading to increasein demand for services and goods. Demand constitute thequantification of customer spending and consumer desire to particularservices or goods at a certain price. When demand goods and servicesare increased, the supply decreases (McConnell et al., 2013). Therelationship between demand and supply is so important in that itregulates the prices of services and goods. Although business leadersdetermine to price, the actual charge is based on demand and supply. For instance, a manager may purchase 200 units of goods and end upselling 120 units. The 80 units of goods left constitute surplus andthus to dispose them would require lowering of prices to avoidexcessive losses. Sometimes, the supplier may supply 200 units andthe customer demand 250 units. Consequently, the manager is awarethat the product is widely held and thus price can be increased.Supply and demand can also affect the level of production and theexpenses of a business or industry (McConnell et al., 2013). Thereason is that production is affected when labor is affected whilecosts are affected when the raw materials are affected. For instance,a company may get cheap labor due to overstaffing by soldiers’spouses in case there is the introduction of a new military camp.When the camp is closed, the company losses labor supply. As aresult, the company may fall or may be forced to pay the extra costfor new work.

Accordingly,the process of making calculated production decisions requires thatthe analysis of the relationship between these two concepts beconducted. Correspondingly, supply and demand are beneficial tobusinesses in that managers use them in maintaining a constant supplyof material or services that they need to support production. Forinstance, stocks may suffer financial losses when the demand forservices and products decreases. As such, they may fail to providematerial to the business. When supplies do not provide equipment, themarket may be weakened or slowed. The concepts of demand and supplymay be useful to business in determining the best time or season tosell their product. The reason is that it is possible to use theforces of supply and demand to establish when to market goods orservices and even the potential benefits. A good example is theselling of ice-cream which peaks during summer and decreases duringwinter. Ice-cream vendors can increase prices of ice-cream duringsummer targeting more profit because they will be out of business inwinter. Such decision cannot be made without sufficient knowledge inthe concept of demand and supply. Correspondingly, knowledge insupply and demand enables companies to provide clients with regularsupply services and goods (McConnell et al., 2013). Accordingly,businesses become predictable and consistent because managers areaware of the rate of demand their products and the most reliable andabundant sources of their raw materials. For instance, businessesthat sell mushrooms must be able to sell the types that are easilyavailable so that clients will be able to plan appropriately becausethe customer can rely on their supplying company.

Elasticityand inelasticity

Elasticityand inelasticity of demand are ranges of comparisons of demand andprice for certain services and goods in the economy. The demand iselastic when the fluctuation of the request for individual productand service match closely, to the variation in price for the sameproduct (McConnell et al., 2013). When the fluctuation in demand forindividual product and service does not match closely to thevariation in price for the same product, the demand is inelastic.Elastic demand is taken to mean that the change in the quantity ofparticular product would change considerably if the price of the sameproduct changes. This trend happens when the proportion of variationof the product demanded is more than the percentage change in theprice of the product. On the other hand, inelastic of demand istaken to mean that the amount of particular product changes slightlyif the price of the same product changes. This change happens whenthe proportion of variation of the product is less than theproportion change in the price of the product (McConnell et al.,2013). The two concepts are percentages of fluctuations in prices andare highly interrelated. Different goods have distinct elasticity.

Elasticityhas an influence on the company’s pricing decisions. Althoughelasticity and inelasticity are of the various types, some are morerelevant to business than the others. A good example is theelasticity of demand dealing with pricing. Price elasticity of demandis the proportion change in quantity that is demanded divided by thepercentage change in price. For instance, if the price of aparticular product increases by a factor of 10 percent, demanddecreases by negative 5 percent. The price elasticity of demand willbe negative 0.5 percent. Nevertheless, the price elasticity of demandis stated as a positive value. Five outcomes may be gotten whenprice elasticity of demand is calculated. If the value is one, theelasticity is referred to as unit elastic while if the value obtainedbetween one and zero, the price elasticity of demand is relativelyinelastic. Moreover, when the value is zero, elasticity is perfectlyinelastic while if the value is limitlessness the elasticity isrelatively elastic. When the price elasticity of demand is infinitelylarge, the value is perfectly elastic.

Elasticityand inelasticity are very relevant in business in that they havesubstantial implications in the prices of particular services andgoods. For instance, if 10 percent increases the amount of yogurt,and demand falls by 5 percent, the manager or business owner will beaware that the price elasticity of demand for the yogurt is elastic.If 10 percent increases the price of chocolate and the price does notchange, the demand for the chocolate product they are selling isrelatively inelastic (McConnell et al., 2013). Consequently, theprice of the entire products in the market must be made with themaximum consideration of the knowledge of elasticity andinelasticity. Elasticity and inelasticity are very valuable tobusiness owners or managers in making significant business decisions.

Priceelasticity of demand has huge impacts on the brand’s decision toincrease the price of various services and goods. Inelastic productshave reduced sensitivity to price increase while elastic goods haveincreased sensitivity to the price increase. For instance, if yogurt(a flexible product) is increased, demand will be decreased, and thusmanagers will not be able to raise the price of yogurt. Such goodsmust be sold at lower prices or relatively constant prices becausethere is no way in which the prices of such product can be increased. Instead, the business will increase the prices of chocolate(inelastic product) whose demand will not be affected by an increasein price (McConnell et al., 2013). Besides, the concepts aresignificant because their analysis provides information regarding thequantity of products consumed by customers when prices of such goodschange. Elasticity and inelasticity are an important concept whoseknowledge can be used to facilitate the process of consolidating twocompanies (merger) to come up with one new entity.

Comparingand contrasting Great Depression and great recession

Thegreat depression was long-lasting and the deepest global economiccrisis that occurred in 1929. On the other hand, great recession wasthe duration of overall economic decline witnessed in the worldmarkets in the late 2000s. The two crises can be compared andcontrasted. Great depression compares to great recession in thatboth crises caused by the activities that had been initiated by thefederal government. In 1929, the government increased interest ratesthat had remained relatively stable in the early 1920s. During thegreat recession, the government pushed for home ownership to peopleirrespective of whether you could afford or not. Correspondingly, inall the crises, the government encouraged massive spending leading tothe budget deficit. Consequently, the federal debt increased in boththe great depression and great recession. In both crises, the rate ofunemployment increased. In the great depression, the unemploymentrate was nearly 24.9 percent while in a great recession theunemployment rate went up to 10 percent. Massive spending was mainlymeant to curb the rate of unemployment. In both recession anddepression, taxes were increased. According to the great depression,the argument was that money that was spending by the government wasto be obtained from the taxes that people were to the government.During the great depression, the marginal tax was raised up to 79percent in 1936, but many American fell under the 50 percent taxbracket. During the great recession, the taxes for liquor, softdrinks cigarettes and plane tickets were increased.

Thegreat depression and great recession contrasted in various ways. Thefree fall was faster and bigger during the recession than it wasduring the depression. For instance, in about one and a half years,the stock prices dropped by 45 percent during the great depressionwhile during the recession, the stock decreased by 54 percent.However, the recovery of this fall was faster in the vast recessionthan in the great depression. Global trade and equity prices in therecession recovered in a period of about ten to fifteen months whilethat of the depression took about thirty-five months which is a veryextended period to such a recovery trend. Similarly, the world shareprices and global trade drop was steeper in the recession compared tothe same share prices and world trade in the great depression. Thebanking sector was more affected in the great depression than in thegreat recession. During the great recession, the gross domesticproduct was hardly affected yet in the gross domestic product fell to13.3 percent in the high depression and took nearly eight years torecover to its original position in 1929. The technologies during thegreat recession had improved tremendously when compared to thetechniques during the great recession, and thus some of thesedifferences were possible.

Blamefor the great recession

Manyreasons have been given regarding who was to blame for the greatrecession. Most of this blame and cause of the recession fall underthe federal government. Both the previous administration that existedduring the recession carries the biggest burden. For instance, therewas strong decrease government spending especially in infrastructure,education, development, and research. Less spending in the maineconomic areas resulted to low investments in productivity leading todecaying highways and bridges. Decreased spending also delayedinvestments thereby leading to adverse consequences for the economy.Consequently, the employed individuals lost employed and wagesleading to recession. Massive budget deficit caused by the war inAfghanistan and Iraq that consumed $1 trillion coupled with reducedtaxes for corporations and investors eventually result in a greatrecession. Budget deficit leads to increase in inflation yet theinterest rates remained relatively low. Lower interest rateencouraged borrowing and investments in buying new homes becauseinflation discouraged savings. The new homeowners had no savings, noemployment and had no income. Eventually, the property pricesincreased and finally collapsed leading to enormous damage to theeconomy. Several economist and investors have also been blamed forfailing to warn the members of the public on the possibility of thecrisis or failing to prevent it at all.


Therelationship between demand and supply is so important that itregulates the prices of services and goods. Similarly, supply anddemand can also have an impact on the level of production and theexpenses of a business or and industry. The concepts of demand andsupply may be valuable to business in determining the best time orseason to sell their product. Analysis of Elasticity and inelasticityis useful to business owners or managers in making significantbusiness decisions. Besides, they are valuable in pricing particulargoods and services. The great depression and great recession havesome can be compared or contrasted. A good example is the fact thatin all the crises, the government encouraged massive spending leadingto the budget deficit and increased debt. The two crises contrast inseveral ways. The free fall was faster and bigger during therecession than it was during the depression. For instance, in aboutone and a half years, the stock prices dropped by 45 percent duringthe great depression while during the recession, the stock declinedby 54 percent. Additionally, the world share prices and global tradedecline was steeper in the recession compared to the same shareprices and world trade in the great depression. The previous andexisting federal government can be blamed for the great recession.


McConnell,C. Brue, S. Flynn, S. (2013), Microeconomics:Brief Edition, 2nd ed., McGraw-Hill.