There have been
recent posts that have discussed certain dimensions of economics. Economics as
we have noticed in the past posts is more about behaviour that anything else. It
is about responses of economic agents manifest to various stimuli. These
responses do not follow a necessary pattern but certain patterns can be
deduced. At the core of economic thinking lies a construction of a relationship
between buyer and seller. This construction was discussed at some length in an
earlier post. These relationships are essentially an interaction between the
terms of exchange of a good and the ability and willingness on the buyer and
the seller to exchange the goods.
There must be a
decision in the first place to produce a good. This implies the following
questions need to be answered. Firstly, what has to be produced? Secondly, how
to produce the same? Thirdly, it needs to factor in for whom to produce. Having
grappled with these questions, there must exist a willingness and desire on the
part of a producer to offer these goods for sale. This willingness may be a
function of the terms of exchange. Furthermore, the willingness has to be
complemented by the ability to produce the goods. In absence of the ability to
produce goods, the willingness might not matter at all and indeed turn
irrelevant. This again brings us to the question on how to produce the goods.
While what to produce and for whom to produce might entail an understanding of
the willingness or desire, the question of how to produce rests on the ability.
Similarly, to a
buyer, the terms of exchange no doubt play a critical role. It is the terms of
exchange that determines the ability of the buyer or otherwise in their final
purchase decision. Secondly, along with the terms of exchange and the ability,
the buyer too must demonstrate a desire and willingness to purchase the goods.
Therefore, as one begins to analyse the dynamics of the relationship and
interplay between willingness, ability and terms of exchange, it becomes
imperative to understand how changes in these will impact the demand supply
dynamics.
A primary consideration
would be understanding the changes in terms of exchange. While economics
assumes ceteris paribus, in reality, there is hardly anything but ceteris
paribus. The realities keep changing and entail numerous interaction variables
and independent variables. Therefore, without an analysis of the same, it is
difficult to decipher the interplay. When the terms of exchange change, what
analysts do would be to isolate the same and study its impact. This is done
through a construction of demand or supply curve and examining the movement
along these curves as prices change. The price changes are taken in isolation
and therefore, the terms of exchange as they undergo a change will not impact
the relationship constructed but only the quantity demanded or quantity
supplied. At higher prices, the buyers will reduce their purchases while at
lower prices, the buyers will increase their purchases. From the producer’s
perspective, at lower prices, usually, fewer producers will offer their goods
for sale while at higher prices, attracted by the incentives, the producers
will usually offer higher number of goods for sale. This is termed, in
economics, as movement along the demand or supply curve.
Yet, while this relationship
doesn’t get impact when price changes are isolated, it must be pointed out,
that price changes are not in silos. They are accompanied by other changes and
at times price changes do induce changes in other factors. These factors other
than price have an impact both on ability and willingness. For instance, as
incomes rise, the ability on the part of the buyers’ changes for the better
thus enabling a prospective buyer consume more for the same price. On the other
hand, if the incomes drop perhaps due to large scale retrenchment or layoffs,
the ability shrinks and thus consumer would reduce the purchases to reflect the
new ability. Implied in this is the relationship between the terms of exchange,
ability and willingness undergo a change? What one generates is the new demand
curve in itself. Similarly, when the cost of production decline, the producer is
able to offer more even though the prices might not have changed. On the
contrary, as the costs of production goes up, the ability of the producer
shrinks thus enabling them offer less at the same price even though other
factors have remained constant. This again implies, the supply curve itself
will change when the dynamics of ability and willingness undergo a change.
On a similar
plane, the willingness to purchase or offer goods for sale might change too. An
introduction of a substitute product will result in the prospective buyer seeking
to explore other alternatives. This in turn would mean the willingness to buy
their current purchase might shrink. Incidentally, on the other hand, the
willingness to purchase the new good would increase. This changes the demand
equations of both the existing product and the new product. To a producer, an
offer of a new product or allure of incentives through a new product might
shrink their willingness to produce the existing product and instead shift to a
new product.
These interplays
between willingness, ability and the terms of exchange are usually represented
in a graphical form through what is described as a shift in the demand or supply
curve. While a change in terms of exchange with all other factors being
constant, one observes a movement on the demand or the supply curve as the case
might be. However, as the ability and willingness itself undergo a change, they
have their impact on terms of exchange resulting in development of new curve
for demand or supply as the case might be. This is known as the shift in supply
or demand curve.
There can be ‘n’
number of factors that can affect all these interrelationships and often are
contradictory to each other. There might be quite a few factors that act in
opposite directions. This necessitates one to study the demand function or the
supply function. Yet a deeper analysis and construction of the same perhaps
cannot be given justice in the current post and hence necessitates an engagement
at a different time.
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