The main objective of a free economic system is to utilize the resources of the country in such a way that production of goods and services out of the available resources may be optimal. In essence, an economic system is characterized by supply and demand of commodities which may be consequently affected by scarcity and choice. Based on the demand and supply of pizzas, this paper analyzes the factors that could lead to changes in these concepts.
Demand is the quantity an individual is willing to buy at a given price over a period of time. It takes authority in the following: ability, time, and price specification. For this reason, the law of demand states that provided other conditions are kept constant, when a price of a commodity increases the quantity demanded decreases and vice versa; there is an inverse relationship between the price of a commodity and quantity demanded (Hardwick et al., 1999).
However, there are other non-price determinants of demand: income, taste and preferences, and prices of related goods. For the case of pizza, when its price increases consumers will generally buy in less quantity, provided other factors are kept constant. For most goods, an increased income will lead to an increase in demand. If a customer purchases ten pizzas a week at $5 apiece, his total for pizzas is $50. If his income increases, he is likely to purchase more pizzas since it is a normal good.
Consequently, a change in consumer tastes in favor of a good can shift the demand curve outwards to the right; increased demand. When pizzas become popular fast food, the demand curve for them shifts to the right; when their popularity decreases, the demand curve shifts inwards. Likewise, the effect of a change in the prices of related goods on a certain demanded commodity relies on the notion of the goods being substitutes or complements. For substitutes, a price change in the substitute will cause a change in the same direction in the demand for the good under study (Maunder et al., 2000). For instance, the prices of pizzas, hamburgers, and hot dogs are all about the same; these are substitutable fast foods. If the price of pizzas increases considerably, while the prices of hamburgers and hot dogs do not, consumers will buy more hamburgers and hot dogs and fewer pizzas because of the price.
In effect, consumers will be substituting hamburgers and hot dogs for pizzas because of relatively high price of pizzas. With complimentary goods, the situation for substitutes is reversed. Products like soda and parmesan cheese can be consumed with pizza because they are complementary goods. If the prices of soda and parmesan cheese decrease, more people will be encouraged to buy more pizzas. On the other hand, if their prices increase, fewer people will purchase pizzas. Thus, for compliments, a price change in a product will cause a change in the opposite direction in the demand for its complement.
The market supply of a commodity is the total quantities that firms are willing to offer and sell over some time period. This implies that firms are economic agents responsible for supply of goods and services. Thus, the law of supply states that provided other conditions is kept constant, when the price of a commodity increases the supply increases and vice versa (Hardwick et al., 1999). Apart from price, other factors that affect supply include the price of inputs, the price of other certain goods, and expectations. If one or more input prices fall, the supply curve will shift outwards to the right; that is, supply will increase.
Otherwise, the supply will decrease. Thus, an increase in the price of tomatoes will result to a decrease in supply of pizzas and vice versa, provided that other factors are kept constant. Consequently, as explained in the factors of demand, prices of related goods also affect supply. Some goods like pizzas and hot dogs are in competitive supply, meaning that one good can be easily produced using the same factors of production as an alternative other good.
The price relationship between two such goods will therefore have a major influence on the amounts that producers are willing to supply. Similarly, a change in the expectation of future relative prices of a product can affect a producer’s current willingness to supply. Restaurant marketers may withhold from market some of their pizzas distribution if they anticipate a higher pizza price in the future. Thus, the current quantity supplied at each and every price will decrease.
Moreover, taking into consideration the quantity demanded and the quantity supplied, it is essential to measure elasticity. In essence, price elasticity measures the responsiveness of quantity demanded and quantity supplied of a product in regard to its price. For instance, consumers demand 24 units of pizza at a price of $12 per unit. When the price rises to $15, consumers are willing to buy 20 units. Therefore, to calculate the price elasticity of demand we use the following formula:
Price elasticity of demand (Ed) = proportionate change in quantity demanded / proportionate change in price.
Ed = (20-24)/24 * 12/ (15-12) = -2/3
The value -2/3 is less than unitary elastic, satisfying the concept of price elasticity of demand.
In calculating the price elasticity of supply (Es), we use the formula:
Es = proportionate change in quantity supplied / proportionate change in quantity demanded (Maunder et al., 2000).
For example, at price of $3 per unit, producers are willing to supply 10 units of pizza and at a price of $4; they are willing to supply 15 units. Thus, the Es is given as:
Es = (15-10)/10 * 3/ (4-3) = 1.5, indicating that pizza is a normal good.
In conclusion, understanding the concept of demand and supply enables people to make right choices for the scarce resources. This paper has explained the various factors of demand and supply in regard to demand and supply of pizzas. These factors include: price, income, preferences, price of related good, and cost of production. Furthermore, the paper has depicted the price elasticity of pizzas and its correctness.
References
Maunder, P., Myers, D., Wall, N., & Miller, R. (2000). Economics Explained. Revised 3rd Ed. London: HarperCollins Publishers.
Hardwick, P., Khan, B., & Langmead, J. (1999). An Introduction to Modern Economy. Upper Saddle River, NJ: FT Prentice Hall.